Mortgage loans stay high despite cuts in base rate

Despite falls in the key interest rates set by the Bank of Korea, net interest spreads of mortgage loans issued by the banks continued to rise in the past two years, data compiled from banks showed.

The average interest rate on home mortgage loans issued by 17 local and foreign banks as of July this year was 2.98 percent. This is achieved by adding the banks’ average base borrowing rate of 1.85 percent and the net interest spread of an average 1.13 percent.

The net interest spread accounted for 38 percent of the total average interest rates on mortgages, rising by 14.2 percentage points from July 2013.

In July 2013, the average mortgage interest rate was 3.82 percent, with the base rate at 2.91 percent. The average net interest spread stood at 0.91 percent, accounting for 23.8 percent of the total interest rate on mortgages.

The rise in net interest spread comes even after the base rate set by the central bank has fallen from 2.75 percent to the current record low of 1.5 percent in the past couple of years. The cost of fund index, a lending benchmark, has also fallen from 2.63 percent in August 2013 to 1.56 percent this month.

This has sparked criticism that banks are trying to make up for their falling profits out of the pockets of average borrowers.

Of the banks, regional banks, including Kyongnam Bank, Kwangju Bank and Daegu Bank, saw the biggest net interest spread increase of 17 percentage points on average over the past two years. The country’s bulge-bracket banks, including Kookmin Bank, Woori Bank, Hana Bank and Korea Exchange Bank, saw theirs expand by 15.6 percentage points. Multinational banks, like Citi and Standard Chartered, saw their spreads grow by an average 14.6 percentage points.

Specialty banks, like National Agricultural Cooperative Federation, National Federation of Fisheries Cooperatives, Korea Development Bank and Industrial Bank of Korea, saw their spreads increase by an average 7.9 percentage points, the lowest among bank groups.

Industry insiders say the growth in net interest spread is due to falls in interest-related profits at banks, their key source of revenue. Banks are increasing the spreads on mortgages as they scramble to generate profits.

Indeed, interest-related net profits from major banks, including Kookmin, Shinhan, Woori, Hana and Korea Exchange Bank, was 8.89 trillion won ($7.53 billion) during the first half this year, down 2.17 percent, or about 200 billion won, from 9.08 trillion won one year ago. Compared to two years ago, they are down 4.25 percent, or 378 billion won.

“Falls in net profit margins have deteriorated banks’ profitability. Banks are in deep trouble having to deal with low [economic] growth and rising household debt. The possibility of individual borrowers’ defaults has grown as well,” said an official at a local bank. “If banks have to lower their spreads, it will come as double blows to those who are already struggling.”

However, there is criticism that banks are trying to make profits by burdening their clients.

“When base rates are low, banks are supposed to lower interest rates on loans as well,” said Cho Nam-hee, head of the Financial Consumer Agency. “But they are not, citing individual credits, transactions history and so on.”

BY PARK JUNG-YOUN[park.jungyoun@joongang.co.kr ]