The bank bond rate that serves as the benchmark for banks' fixed-rate mortgage loans rose back into the 3% range for the first time in half a year. Bank bond rates move in tandem with the flow of Government Bonds, and despite the recent trend of U.S. base rate cuts, Government Bonds yields are rising as external uncertainty persists and the won remains weak. Fixed-rate mortgage loan rates at commercial banks have also exceeded the 4% range annually.
According to the financial sector on the 11th, the average rate on five-year (AAA) bank bonds rose to 3.025% on the 1st after recording 3.005% on the 30th of the previous month. It has been six months since bank bond rates entered the 3% range, last seen on Mar. 28.
The bank bond rate fell to 2.685% at the end of April and then moved sideways in the upper 2.8% range. Then, after recording 3.9% on the 24th of the previous month, it rose 0.1 percentage point in five trading days. The five-year bank bond rate is the benchmark rate for fixed-rate mortgages in the banking sector. Banks calculate the final loan rate by adding a spread and other components to the bank bond rate.
As bank bond rates rise, mortgage rates at commercial banks are also climbing. As of the previous day, the upper end of the five-year fixed-rate mortgage range at the four major commercial banks—KB Kookmin, Shinhan, Hana, and Woori—was in the low 5% range annually. Compared with the previous month, it rose about 0.15–0.17 percentage point. The lower end of the range is also in the mid-3% annually.
The recent uptick in bank bond rates since the latter part of the previous month is attributed to higher Government Bonds yields. As tariff negotiations between Korea and the United States hit an impasse, Korean government bond yields are surging. Korea and the United States reached an agreement in late July to lower tariffs on Korean-made products from 25% to 15% and invest $350 billion in the United States, but they have not narrowed differences over investment methods and other details.
Bank bonds usually move with the flow of Government Bonds yields. According to the Seoul bond market, the three-year Government Bonds yield rose to 2.610% on the morning of the previous day. This is the highest level since Mar. 28 (2.622%).
There is also an aspect in which market rates reflect expectations that the Bank of Korea's rate cut will be delayed more than expected due to rising home prices and exchange rate instability. The market initially expected the central bank to cut its base rate in October, but is revising the timing to late November.
For the time being, mortgages at commercial banks are expected to remain a high bar. To expand productive finance, financial authorities decided to raise the risk weight for mortgages from the current 15% to 20% starting in the first quarter of next year. Raising the mortgage risk weight increases risk-weighted assets and lowers banks' capital ratios. Banks will have to reduce mortgages to meet capital ratio requirements.
A commercial bank official said, "Since the June 28 real estate loan regulations, the increase in mortgages has been slowing," but added, "It will not be easy to cut rates for the time being to control the pace of mortgage growth."