In an effort to reduce the scale of household loans, major banks have significantly increased their additional interest rates, resulting in the portion of additional rates in total household loan interest rates expanding up to three times. The additional interest rate is the rate added by financial institutions on top of the base rate to cover risk premiums among other things, serving as a source of bank interest income. Consumers have expressed dissatisfaction as the perceived benefits of the two base rate cuts by the Bank of Korea last year were minimal, largely due to these increased additional interest rates. This trend is analyzed as being influenced by regulatory authorities maintaining policies to curb household loans, prompting banks to raise additional interest rates.
According to the Korea Federation of Banks, as of December last year, the proportion of additional interest rates in new household loans granted by the top five banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) reached 32-40%. This is an increase of 2-3 times from the same period the previous year when the proportion was 13-25%.
Banks extend loans to households with an interest rate composed of the base rate plus the additional interest rate. The base rate refers to rates like COFIX (Cost of Funds Index) or rates of financial bonds and negotiable certificates of deposit (CD) used by banks for fundraising. In contrast, the additional interest rate is determined independently by banks, encompassing elements such as risk, liquidity, and credit premiums, capital and legal costs, operating costs, expected rates of return, and other adjustments.
At the end of last year, even though the Bank of Korea reduced base rates consecutively by a total of 0.5 percentage points, the substantial increase in additional interest rates by banks meant that the overall household interest rate did not decrease. For instance, the average household loan interest rate at KB Kookmin Bank remained similar, dropping slightly from 4.52% to 4.49%, despite the base rate falling significantly from 3.82% to 3.04%, due to an increase in the additional interest rate from 0.7% to 1.45%.
Similarly, Shinhan Bank saw its average household loan interest rate rise from 4.38% to 4.9% during the same period, with the additional interest rate jumping from 0.59% to 1.78% despite a decrease in the base rate from 3.79% to 3.12%.
Woori Bank had the highest additional interest rate among the five major banks at 2.09% last December, with its proportion in household loan interest rates growing from 19% to 40%. While Hana and NongHyup Banks witnessed some decrease in household loan rates, the proportion of additional interest rates in total loan rates still exceeded 30%.
Moreover, in repayment mortgage loans, the proportion of additional interest rates doubled to over 30% last December, reaching the highest level in three years since 2021. Given that mortgage loans comprise a substantial 80% of bank loans, many households remain affected by interest rate fluctuations.
As the proportion of additional interest rates in loans increased, the gap between deposit and loan interest rates—a measure of how much profit isn’t added to customer funds for lending—also widened for most banks. For instance, the gap at Hana Bank expanded from 0.53 percentage points to 1.19 percentage points, while Shinhan Bank saw it grow from 0.43 percentage points to 1.01 percentage points.
With banks maintaining a high proportion of additional rates, individuals have scarcely felt the impact of base rate reductions, prompting financial authorities to urge banks to “make the effects of rate cuts tangible.” This led several banks, such as Shinhan, Woori, SC First, and IBK, to begin lowering additional interest rates at the start of the year.
Nevertheless, if financial authorities continue their current household loan management stance, it may take considerable time for consumers’ actual interest burdens to decrease since rate hikes remain a primary tool for managing loan demand. A financial industry insider noted that the dual goals of tight household loan management and providing consumers with rate cut benefits might seem contradictory, highlighting the need for policies that balance stable loan management with relieving borrower interest burdens.
Meanwhile, financial authorities are planning a meeting to inspect household loans and announce detailed strategies for household debt management this year. Chairman Kim Byeong-hwan of the Financial Services Commission previously expressed the goal to manage this year’s household loan growth rate within the economic growth rate increase range of 3.8%. Since the surge in household loans seen since last August, authorities plan to continue management across all financial sectors this year.
However, local bank lending will be incentivized to allow for more loans depending on whether banks meet targets. Furthermore, policies might allow expanded loan targets compared to last year for the secondary financial sector, which has reduced loans for the past three years.