Lending Rates Soar as Market Rates Climb

Bank loan interest burdens are increasing. This is because market rates for government and bank bonds continue to rise, as both South Korea and the U.S. face difficult conditions for lowering benchmark interest rates. As of the 30th of last month, mortgage rates at major banks had surged to a maximum of 6.390% annually. Moreover, the government's efforts to curb fund inflows into the real estate market by tightening regulations on jeonse loans are impacting the overall financial market.

As commercial banks' mortgage loans face tightening due to government regulations, policy loans like the Bogumjari Loan saw an increase of over 7 trillion won in the first quarter of this year, a faster pace compared to the previous year.

Policies aimed at encouraging the release of real estate inventory require support to absorb these properties. If supply and demand imbalances persist, it could lead to unexpected market shocks. The government could consider excluding long-term fixed-rate mortgages from household debt aggregate volume regulations. This could help in absorbing inventory, accommodating policy finance demand, and improving the quality of household debt. Long-term fixed-rate mortgages, such as 30-year loans, can help manage interest rate risk during global economic or geopolitical events. Considering that variable-rate mortgages account for over 60% of domestic home loans, this would be beneficial. Additionally, there is a need to reorganize the system for calculating mortgage rates that is repeatedly applied during events.

Recently, a mismatch has emerged where deposit rates remain around 2%, while mixed-rate 5-year mortgage rates at commercial banks exceed 7%. This stems from using policy rates as a benchmark for deposits and market rates for mortgages. The method by which commercial banks announce new mixed-rate mortgage rates daily or weekly, based on 5-year bank bonds, can exacerbate social fatigue during periods of rapidly rising bank bond rates. Consideration is needed for alternative benchmark rates to replace bank bonds, the current benchmark. A significant portion of the funds raised by banks through mixed-rate mortgages comes from deposits, with only about 10% sourced from issuing bank bonds. In this context, there is little justification for linking mortgage rates to the volatile and high-interest 5-year bank bonds. Alternatives like IRS swap rates, which are relatively lower and can reflect funding costs more realistically, could be considered.

Recently, U.S. financial institutions have diagnosed short-term and long-term Treasury yields as being in a state of fragile equilibrium. Volatility has become a constant.