Chopped interest rates confuse savers, borrowers

Home > Business > Industry

print dictionary print

Chopped interest rates confuse savers, borrowers

Hwang Hye-jeong, 37, took out a mortgage of 200 million won ($179,067) in January 2008 to buy an apartment ahead of her wedding. She borrowed from the Korea Housing Finance Corporation and her mortgage had a fixed interest rate.

In 2012, as the central bank repeatedly cut interest rates, Hwang transferred to another mortgage program with a 4.6 percent annual rate.

But after the Bank of Korea cut the base rate to a new record low of 1.5 percent recently, Hwang is once again mulling refinancing her apartment.

“I’m considering shifting into another loan again,” Hwang said. “But this time I don’t know whether I should choose a fixed-rate or floating rate as I’m not sure whether the key policy rate will be cut again or not.”

With another BOK decision on rates coming this month, both debtors and creditors are pondering their portfolios.

Local banks have started to cut deposit rates. The Korea Exchange Bank cut the interest rate on one of its one-year installment savings programs, “YES Great Joy Savings,” to 1.4 percent from 1.65 percent. NH Nonghyup Bank is also preparing to lower interest rates on its savings products by 0.25 percent point. KB Kookmin Bank said it would trim a one-year installment savings’ annual deposit rate by 0.1 percent point to 1.4 percent.

Worries over cuts in deposit rates mounted for people who have depended on making money from interest on bank accounts. While the BOK expects Korea’s inflation rate to be around 2.2 percent next year, deposit rates that average around 1 percent, as they do now, won’t even break even.

“It’s been more than six months since the real interest rate sank below zero,” said Lee Yeong-ah, a banker at the Industrial Bank of Korea. “People should invest in higher-risk products [to get higher returns].

“Also, when the key policy rate is low, saving on taxes is one of the best investment techniques now,” Lee added. “I recommend you purchase some products that could save more on taxes.”

Lee Sang-geon, a senior analyst at the Mirae Asset Retirement Institute, said, “People should lower their expectation on earnings [from deposits at banks] and focus on a higher-risk investment and saving on taxes. They should restructure their asset portfolios by investing in medium-risk products that can generate 4 or 5 percent of earnings.”

Borrowers are also gauging their options.

“People who got a fixed-rate loan are recommended to transfer to a lower-rate program,” said Park Il-geon, an asset manager at Woori Bank.

But many asset managers are warning people not to be hasty due to the looming possibility of a U.S. rate hike within this year.

“Even if the lending rate is low now, you should only borrow as much as you need for your jeonse deposit or mortgage, but not too much,” Shin Dong-il, an asset manager at KB Kookmin Bank, said. “We particularly recommend you close out some high-rate loans, such as loans on credit cards.”


BY CHO HYUN-SOOK, YEOM JI-HYUN [kim.heejin@joongang.co.kr]

More in Industry

Majestic flight

Hyundai Motor is new darling of the stock market

Doosan Tower sells for 800 billion won as financial woes continue

Hyundai E&C wins big rail project contract in Philippines

Spud sundaes and ugly apples as retailers rush to help farmers

Log in to Twitter or Facebook account to connect
with the Korea JoongAng Daily
help-image Social comment?
lock icon

To write comments, please log in to one of the accounts.

Standards Board Policy (0/250자)

What’s Popular Now