Interest Hikes Take Toll on Homeowners

Bank interest rates on mortgage loans hit an annual high on the back of call rate hikes, imposing a heavier burden on those who want to take out loans as well as existing borrowers who service interest.

Commercial banks increasing interest rates-

Kookmin, Shinhan, Woori, and Hana banks’ annual interest rates on mortgage loans ranged from 5.41 to 6.81 percent as of December 11, with Kookmin at 5.72 to 6.72 percent, Shinhan at 5.71 to 6.81 percent, Woori at 5.41 to 6.71 percent, and Hana at 5.76 to 6.46 percent.

These figures are this year’s highest levels, up 0.03 to 0.23 percent from a week ago based on the lowest rate applied to households.

The rate hikes have something to do with the continuous increase in the CD rate, which is a major rate-setting standard for banks, and commercial banks’ recent prime rate reductions are in line with a government policy to induce banks to cut mortgage loans. The CD rate stood at 4.71 percent as of December 8, reaching an all time high in 44 months after March 28, 2003.

Growing burdens, growing concerns-

Businesses and households are expected to have difficulties with servicing interest due to the high rates.

If a person borrowed 100 million won from Woori Bank in December last year, putting a house down as collateral with a minimum annual interest rate of 4.66 percent, he would have to pay only 4,660,000 won in interest.

However, if he borrows the same amount in December this year, the number goes up to 5,410,000 won in accordance with an annual interest of 5.41 percent.

Mortgage loans have continuously increased to 4.1758 trillion won in November to record a 50-month high. The banking sector predicts that many customers will default on their loans because of this trend.

Lee Myeong-hwal, a researcher at the Korea Institute of Finance, pointed out that non-performing loans will increase as 70 percent of bank mortgage loans are taken out on conditions of lump sum repayment.

Drastic rate increase is a drag on the economy-

Economic experts are concerned that drastic rate increase might dampen the economy. Professor Hong Ki-tak at Chung-Ang University said that raising interest rates could take a toll on the household economy if inflation hampers the growth of real national income despite economic expansion. He went on to say that the government should ease regulations to stimulate domestic consumption.

Meanwhile, financial experts advised that those who are to take out mortgage loans make the best use of incentives provided by banks to reduce their burden.

legman@donga.com