Negative interest rates continue to increase at commercial banks. Will refinancing loans accelerate the virtuous cycle in the market?

Bank bond interest rates-Cofix continues to fall
‘At-a-glance interest rate comparison’ encourages competition
Blocking illegal activities such as phishing impersonating a bank is a task

Interest rate cuts by commercial banks have gained momentum. This is as competition among banks to attract demand for mortgage replacement is intensifying following the reduction of the financing cost index (COFIX), which is the standard for calculating interest rates for variable-rate home mortgage loans, and bank bond interest rates. The positive effects expected from home loan refinancing, such as increasing convenience for consumers and providing new opportunities for local banks, appear to be coming true one by one.

Mortgage interest rate cut felt directly, ‘suddenly’ in 2 months

According to the Korea Federation of Banks consumer portal on the 17th, as of the previous day, the fixed interest rate (mixed type) for mortgage loans of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was 3.31 to 5.723% per annum. Compared to November last year, when the interest rate was 4.39-6.72% per annum, the upper and lower ends were lowered by about 1 percentage point.

The reason for the significant decline in mortgage interest rates in just two months can be attributed to the decline in bank bond interest rates and COFIX. Domestic bank bond interest rates, which rose due to a surge in U.S. Treasury interest rates, have been steadily declining since October of last year, and COFIX (based on new transaction amounts) announced on the 15th of this month also recorded 3.84%, down 0.16 percentage points from the previous month. As a result, banks, whose funding cost burden has decreased, appear to be rushing to lower interest rates on mortgage loans.

The emergence of refinancing loan platforms also encouraged banks to compete to lower lending rates. The service, which launched on the 9th, allows customers to compare interest rates from multiple banks using an online platform and then transfer existing mortgage loans without visiting a branch. After the launch of the service, banks targeting transfer demand rushed to lower interest rates in earnest, including introducing negative additional interest rates. Among these, banks are being caught one after another offering interest rates in the mid-3% range, which is lower than the 5-year bank bond interest rate (3.774%, unsecured/AAA).

KB Kookmin Bank set the interest rate for primary loans (mixed type) at 3.63%. Considering that KB Kookmin Bank reflects the standard interest rate for 5-year bank bonds at 3.80%, a negative additional interest rate of 0.17%p was applied. The industry consensus is that KB Kookmin Bank actually cut the interest rate at the risk of negative margins, as business expenses, etc. are being invested in addition to the basic bank bond interest rate. In addition to KB Kookmin Bank, Woori Bank is applying a negative additional interest rate of 0.16%p, and Shinhan Bank and Hana Bank have applied a negative additional interest rate of 0.15%p.

Internet banks have also joined the race to lower interest rates by offering lower operating costs compared to commercial banks. Kakao Bank set the mixed interest rate for home loans at 3.419-3.748% and attempted to attract consumers’ attention through large-scale events, while K Bank is offering interest rates of 3.59-5.22%. Toss also set a minimum interest rate of 3.50%.

Regarding the competition to cut interest rates like this, an official from a commercial bank said, “As the high interest rate trend continued from 2021 to last year, consumers’ sensitivity to interest rates has reached its peak,” adding, “The competition to cut interest rates that started with the drop in COFIX is the main focus.” He predicted, “Coinciding with the launch of the loan repayment service, the level will increase for a while.”

Refinance loan, which went through trial and error, is expected to settle quickly and create a virtuous cycle in the market

Experts agreed that banks’ competition to reduce interest rates would lead to a virtuous cycle in the market, including improved convenience for consumers. This is because the credit loan refinancing service, which started in May of last year, has established itself in the market relatively quickly and is reducing financial costs for consumers, despite some side effects such as difficulty in using it for people with low credit and illegal advertisements pretending to be refinancing loans. In fact, according to the financial authorities, the number of credit loan refinancing cases processed through the refinancing loan platform reached 43,800 in just two months after the launch of the service, with an average of more than 700 consumers switching from existing loans to low-interest products per day.

Another positive effect expected from the implementation of the refinancing loan service is that it provides new opportunities to local banks by dispersing consumers who were concentrated in commercial banks. The five major regional banks (Busan, Daegu, Gyeongnam, Gwangju, and Jeonbuk) have entered the refinancing loan platform of fintech companies such as Pinda and Toss, and Naver Financial is also coordinating details to enter regional banks, including Jeonbuk Bank.

Stabilizing the system and blocking illegal elements such as phishing that exploits refinancing loans were given as tasks. Most platform problems, such as connection delays or errors, have been resolved, but it is pointed out that damage prevention measures are urgently needed as the proportion of damage from voice phishing (account transfer type) impersonating financial institutions increased from 4.7% in 2022 to 12.5% ​​last year. Recently, there has been a rapid increase in scams asking people to deposit amounts worth up to tens of millions of won, claiming that they can switch to low-interest loans by repaying part of their existing loans. An official from the Financial Supervisory Service said, “Ultimately, such damage can be prevented only when consumers’ financial awareness is improved. Although we are providing more active prevention education, there are limits to the investigation of criminals.”