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Interest on Mortgages Nearing 10%

Posted September. 29, 2008 09:12,   


Mortgage borrowers will have to pay interest of 10 percent on their loans as a result of the global financial crisis. Furthermore, the buying power of the average Korean household is being squeezed due to the weakening won and rising inflation.

Experts warned that high interest rates and prices will reduce domestic consumption and slow economic growth over the long term.

Banking industry sources said Shinhan Bank has raised the three-year fixed rate mortgage to 8.26 to 9.86 percent a year, up 0.47 percentage points higher than last week’s highest rate. Woori Bank will also charge 8.43 to 9.53 percent interest and Kookmin Bank 8.11 to 9.61 percent.

The series of hikes are blamed on Wall Street turbulence and investors’ mass selling of bonds. As a result, bonds issued by banks are losing value, which translates into higher interest on the bonds. Thus, the fixed-rate mortgage, which is connected to bond market fluctuations, is also losing value. The Korean Securities Dealers’ Association said the interest on the one-year bank-issued bond shot up 0.48 percentage points from 6.75 percent Sept. 19 to 7.23 percent Friday.

The interest on certificates of deposit is also rising after having remained stable for almost about a month. Consequently, the adjustable rate mortgage is under pressure for a hike as well. Industrial Bank of Korea increased interest on the adjustable rate mortgage to between 6.80 and 8.30 percent, or up 0.09 percentage points from last week. Similarly, Korea Exchange Bank raised its interest for the mortgage two tenths of a percentage point to 6.62 and 7.90 percent.

Likewise, the Korean won has seen its lowest value against the U.S. dollar in four years and one month. Thus consumer prices will see upward pressure again after going up in the wake of oil price spikes.

The won closed at 1,160.50 to the greenback Friday in Korea, the highest rate since 1,162.30 on Aug. 13, 2004. The won-dollar rate was 936.10 on Dec. 31 last year.

The Bank of Korea said a one-percent rise in the foreign exchange rate pulls up the annual inflation rate eight hundredths of a percentage point. A sudden dive in the won’s value is especially hard on families that have children studying overseas or small companies that have loans from banks in foreign currencies.

Bae Sang-geun, a researcher at the Korea Economic Research Institute, said, “Under the current situation, the government has almost no microeconomic means to stabilize the market.”

parky@donga.com crystal@donga.com