Interest rates subsiding

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Interest rates subsiding

The highest interest rate on mortgages offered by commercial banks fell below 3 percent Monday due to the Korean central bank’s interest rate cut Thursday.

The decline indicates that Korea has entered a new era of low interest rates, with mortgages at around 2 percent.

Korea Exchange Bank lowered the highest rate on its mortgages from 3.02 percent to 2.99 percent on Monday. It has no mortgage with an interest rate higher than 3 percent.

The bank’s action immediately followed the Bank of Korea’s cut in the benchmark rate on Thursday to 1.75 percent, an all-time low.

According to sources in the banking industry, other banks are planning to follow suit.

Woori Bank is expected to lower the lowest rate of a floating-rate mortgage from the current 2.88 percent. Shinhan Bank is also projected to cut its lowest mortgage rate of 2.98 percent.

Zhin Woong-seob, governor of the Financial Supervisory Service, expressed his commitment to expanding the positive effect of the lowered interest rate on Monday in a meeting with senior officials.

“In order to make the interest rate cut effect be directly linked to economic recovery, financial institutions need to join the mood,” Zhin said. “Despite some worries that the rate cut might aggravate institutions’ profitability, they need to cooperate [with the central bank] to contribute to reviving the economy and reducing consumer costs. In the long run, this will have a greater positive effect.”

The FSS plans to urge financial institutions to adjust their interest rates in a timely fashion.

Not only mortgages, but also time deposits have interest rates around 2 percent these days.

Some commercial banks have already pushed deposit rates below 2 percent. A Citibank Korea time deposit called “One-year Freestyle” offers a 1.6 percent interest rate.

“It’s only a matter of time that even installment savings, which usually have higher interest rates than time deposit products, could go down to 1 percent,” an official at a commercial bank said.

It is the first time for Korea to experience such low interest rates. Costs for borrowers are expected to be reduced.

Until 2012, the average mortgage rate was 4.6 percent. Now that the mortgage rate has been slashed to around 2 percent, the annual borrowing cost for 200 million won ($177,000) will decline from about 9.2 million won to 5.2 million won.

But concerns about adverse effects of cheap loans are mounting because of the country’s runaway household debt.

Due to the government’s easing of loan-to-value and debt-to-income ratios last year, mortgage issuances surged to 4.6 trillion won in August, up from 2.6 trillion won in July. New issuances recorded 6 trillion won in October, 5.9 trillion won in November and 6.2 trillion won in December. In February, about 4.2 trillion won worth of mortgages were newly issued, marking the largest February growth since 2008.

Including mortgages, total household debt grew 6.6 percent last year, exceeding the current GDP growth rate of 4.6 percent.

Borrowers are mulling the choice between fixed-rate and floating-rate loans.

If the central bank is going to cut the key rate once more, borrowers should stick to floating rates.

Commercial banks are scheduled to launch convertible mortgages that can switch current floating-rate loans to fixed rates on March 24 as part of a government initiative to help ease the financial burden on households. The average rate of the loans will be around 2.6 percent.

The convertible mortgages, promoted by the Financial Services Commission, will benefit borrowers who took out loans at floating rates of around 3 or 4 percent.

But if the key interest rate goes down once more by 0.25 percentage point around May, floating rates might be smarter.

What bugs consumers is that they have to make the decision as soon as possible, since the total amount of convertible loans is set at 20 trillion won based on a first-come, first-served basis.

People who have borrowed loans with fixed rates during the time with higher rates or those who are on loans that are at a fixed rate for a certain period of time and a changing rate for the rest of the contract are having more headaches. The FSC convertible loan is not designed for those who have such mixed-rate programs.

A corporate employee surnamed Shin borrowed 70 million won last year on a contract that charges 4.9 percent interest a year for the first three years.

After that, the rate will be variable. Shin is not enjoying the benefits of a lowered interest rate.

“Even though the rates are going down, I pay 850,000 won in interest every month,” he said. “I hope the government loan program is extended to people like me.”

BY SONG SU-HYUN, CHO MIN-GEUN [song.suhyun@joongang.co.kr]

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