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Banks bump up mortgage spreads

Published: 27 Nov. 2014, 20:54

Despite benchmark interest rate cuts, commercial banks have raised spreads on mortgages offered to borrowers with low credit scores, bringing a flood of complaints from consumers frustrated by inadequate interest rates on savings accounts.

Since Finance Minister Choi Kyung-hwan assumed office in July, the central bank has cut the benchmark rate twice to 2 percent, the lowest since 2009.

Although the key rate was slashed 0.5 percentage point, average mortgage rates from June through October fell just 0.16 percentage point.

According to the Korea Federation of Banks, major commercial banks increased the average spread from 0.3-0.6 percentage point to about 1 percentage point last month.

Nonghyup Bank’s spread went from 0.34 percentage point in July to 0.94 percentage point last month. Korea Exchange Bank raised its spread from 0.6 percentage point to 1.02 percentage point during the same period.

Other banks pushed up their rates slightly to above 1 percentage point.

The moves are seen as attempts by banks to protect profits. Banks’ rates are determined by adding the spreads to the central bank’s key interest rate.

As a result, the interest rates of mortgages offered by Nonghyup rose from 3.31 percent in July to 3.56 percent last month.

Meanwhile, the average interest rate for deposit accounts sank below 2 percent for the first time this year, according to Bank of Korea data. The rate stood at 1.97 percent in October, down from 2.01 percent in September.

“Banks can set their spreads on their own considering their target profits,” said Lee Jae-yeon, a researcher at the Korea Institute of Finance. “They can lower spreads on products that they want to sell more of while adding to others.”

But it is becoming a bigger controversy as banks have been found to be raising spreads more for consumers with low credit ratings.

According to the data, Shinhan Bank increased the spread for borrowers in the top three credit levels from 1.02-1.04 percentage point, compared to 1.10-1.29 percentage point for those in the three lowest levels.

Woori Bank cut the spread for top-level customers from 1.93 percentage point to 1.85 percentage point, while it raised it for customers in the bottom level from 5.95 percentage points to 6.15 percentage points.

BY SONG SU-HYUN [[email protected]]