Mortgage Rates Hit 7.5%, Unsecured Loans 6.18%... "Yeongkkeul" and "Bittu" Accelerate Despite Surging Interest Rates

Bank Bond Yields Rise on Prospects of Base Rate Hike
Some Banks Raise Rates by 0.07 Percentage Points in a Single Day
Mortgage and Unsecured Loan Balances Increase Despite Higher Interest Rates

The interest rate on mortgage loans has surpassed 7.5% for the first time in three years and seven months. This is due to mounting inflationary pressure caused by the prolonged war in the Middle East, as well as the growing likelihood that the Bank of Korea will raise its base rate in the second half of the year. With bank bond yields surging, interest rates for unsecured loans are also approaching the mid-6% range. Despite the rising rates, the phenomena of "Yeongkkeul" (maxing out loans) and "Bittu" (investing with borrowed money) are accelerating.

According to the financial sector on June 11, the mixed (fixed) interest rates for mortgage loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup), based on 5-year bank bonds as of the previous day, ranged from 4.51% to 7.50% per annum. This is the first time since the Legoland incident in November 2022 (when the upper end stood at 7.7-7.8%) that the upper end of fixed mortgage loan rates at the five major banks has exceeded 7.5%. The upper bound has risen by 0.50 percentage points compared to May 8 last month, when it surpassed 7% (4.40-7.00%), and by 0.40 percentage points compared to the end of last month (May 29). There have been seven business days at banks so far this month, equating to a daily average increase of more than 0.05 percentage points. In fact, one commercial bank raised its 5-year fixed mortgage rate by 0.07 percentage points compared to the previous day.

As of this day, the fixed interest rates for Jeonse (long-term lease) loans stood at 4.11% to 6.71%, and variable rates ranged from 3.15% to 5.85%, both on the verge of entering the 7% and 6% ranges, respectively. The upper end of unsecured loan interest rates (1-year maturity) also surpassed 6%. As of June 10, unsecured loan rates ranged from 4.59% to 6.18% per annum, with the lower end up 0.52 percentage points and the upper end up 0.56 percentage points from May 8 last month. Even compared to the previous day, the upper bound rose by 0.05 percentage points.

The sharp increase in rates at commercial banks is attributed to the intensifying inflationary pressure caused by the Middle East conflict and the rise in bank bond yields due to expectations of a base rate hike. As the war in the Middle East has dragged on for more than three months and international oil prices have climbed, the consumer price index last month reached 119.92 (2020=100), up 3.1% compared to the same period last year. This is the highest level in two years and two months since March 2024.

Globally, with inflation and pressure on central banks to raise rates intensifying, there are projections that the Bank of Korea could raise its base rate twice this year, which is pushing up bank bond yields. According to the Korea Financial Investment Association’s bond information system, the interest rate on 5-year bank bonds (unsecured, AAA-rated), which serves as the benchmark for fixed mortgage loans, and on 1-year bank bonds, which serve as the benchmark for unsecured loans, are both rising sharply. The 5-year bank bond rate, which was 3.497% on January 2 this year, rose to 4.207% at the end of last month, up 0.71 percentage points, and soared to 4.473% on June 8. The 1-year bank bond rate also jumped from 2.760% at the start of the year to 3.453% at the end of last month, up 0.693 percentage points, and rose by another 0.166 percentage points to 3.619% on June 8.

There are also concerns that the increase in household loans is adding to the upward pressure on interest rates. Normally, when interest rates rise, both the balances of mortgage and unsecured loans decrease, but during this recent rate hike cycle, both balances have increased, prompting banks to raise rates further. The outstanding balance of mortgage loans has fluctuated since January this year. It decreased by 1.4836 trillion won in January, increased by 596.7 billion won in February, and decreased again by 387.2 billion won in March. After increasing by 1.9104 trillion won month-on-month to 612.2443 trillion won at the end of April, the balance increased by another 1.1437 trillion won to 613.3880 trillion won at the end of May. As of June 9, the outstanding balance of mortgage loans stood at 613.7680 trillion won, up 380 billion won from the end of last month, while the balance of unsecured loans also increased by 1.689 trillion won from 106.5154 trillion won to 108.2044 trillion won.

Within the banking sector, it is believed that rising interest rates and the depletion of banks’ mortgage loan limits are heightening borrowers' anxiety, while overheated enthusiasm for stock investments is also contributing to the increase in balances of both mortgage and unsecured loans. A bank official explained, "Despite the government's strong real estate control policies, housing prices in Seoul, Gyeonggi, and other metropolitan areas are rising rapidly, causing a surge in mortgage loan applications driven by fear. At the same time, unsecured loans are also increasing rapidly as people borrow to buy stocks during market downturns,” adding, “As banks, we have no other choice but to raise rates, given the combination of high interest rates, high inflation, and the rapid increase in household loans."

This content was produced with the assistance of AI translation services.