Cheaper Than Banks" Unprecedented Interest Rate Reversal… 'Young-blooded Borrowers' Rush In

An unprecedented phenomenon has occurred where insurance companies' mortgage rates have become lower than those of the top five commercial banks, leading to a surge in mortgage applications to insurance firms.

An unprecedented phenomenon has occurred where insurance companies' mortgage rates have become lower than those of the top five commercial banks, leading to a surge in mortgage applications to insurance firms. This situation arises as a "balloon effect," where the demand for loans shifts to the second financial sector due to the financial authorities tightening regulations on banks. With authorities also demanding the second financial sector manage household debt, insurance companies have hurriedly raised their loan interest rates. This situation is leading to significant side effects of government-controlled interest rates.

Mortgage Applications Flooding into Insurance Companies

According to the insurance industry on the 28th, the number of mortgage applications received by Domestic Insurance Company A reached 147 on the 26th. This is nearly double the daily average of 75 applications recorded in July. The number of mortgage applications at Insurance Company B also increased by 36% during the same period. This indicates that consumers are flocking to insurance companies for mortgages. The decrease in insurance companies' mortgage rates compared to the rates of commercial banks, which have been raised more than 20 times since last month, is thought to be the reason.

This phenomenon contradicts the financial authorities' perception of the situation. The Financial Supervisory Service stated the previous day, "There has not been a noticeable shift in loan demand to insurance companies or smaller financial institutions," citing that insurance company loan balances are maintained at a certain level.

However, loan balances lag behind actual loan demand by about a week. This is because insurance companies typically take about a week to process and approve mortgage applications from customers. Therefore, it is argued that the number of applications should be examined to accurately analyze mortgage demand. An industry insider said, "Since last weekend, there has been a flood of mortgage applications and inquiries. The number of applications has continued to increase since the 26th."

Acceleration of the 'Balloon Effect' in the Second Financial Sector

As loan demand surged, insurance companies have resorted to raising interest rates. Samsung Fire & Marine Insurance raised its fixed-rate mortgage to between 3.19% and 3.68% from the previous rate of 3.35% to 3.75%. Samsung Life Insurance also adjusted its non-face-to-face mortgage rates to between 3.49% and 4.79% from the previous range of 3.54% to 4.84%. Other insurance companies are also reportedly considering raising their mortgage rates.

Nevertheless, the trend of shifting demand to the second financial sector is expected to continue for the time being. For consumers, borrowing from insurance companies is advantageous in terms of interest rates and loan limits. The fixed-rate mortgages of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NongHyup) range from 3.65% to 6.05% annually. Compared to Samsung Life Insurance's mortgage rates, the interest rates of the five major commercial banks are higher at both ends. Typically, mortgage rates in the second financial sector, like insurance companies, are about 0.5% to 1% higher than those in the first financial sector. However, recent continuous rate hikes by banks have led to market distortions.

The disparity in loan limits between insurance companies and banks is expected to widen further. The total debt service ratio (DSR) for the second financial sector, including insurance companies, is 50%, which is higher than the 40% limit for the first financial sector. Recently, banks have been reducing loan limits or halting new loans, increasing barriers.

Starting in September, banks will implement a strengthened stress DSR of an additional 1.2% for housing in the metropolitan area. In contrast, the insurance sector will only apply an additional 0.75%. For apartments in Seoul, the difference in mortgage limits between banks and insurance companies is expected to be several tens of millions of won. A financial industry source said, “Originally, DSR regulations in the insurance sector were relatively relaxed, but as banks tighten their own loan regulations, the attractiveness of insurance company loans is increasing.”

In the past, when household debt surged, tightening bank loan regulations led to a balloon effect where loan demand shifted to the second financial sector. In July 2021, during the peak of 'young-blooded borrowing,' household loan balances in the second financial sector increased by 5.6 trillion won in just one month.