Share of Loans with Interest Rates Above 4% Nears 70%... Up 24 Percentage Points in One Year

Expanded From 42% to 66% in Just One Year
Rise in Mortgage Rates and Increase in Unsecured Loans Drive Up Proportions
Share of Loans Above 5% Also Rose From 9% to 14%
Mortgage Rate Upper Limit Reaches 7.54%
"Loans With Rates Above 5% Likely to Grow Further"

The proportion of household loans with annual interest rates exceeding 4% is approaching 70%. With mortgage loan rates on the rise and an increase in unsecured loans, this figure has surged by about 24 percentage points in just one year. As the Bank of Korea shifts toward tighter monetary policy and banks strengthen their control over total household loan volumes, the share of loans with interest rates above 4% is expected to increase further. This signals a steep rise in interest burdens for households.

According to the Bank of Korea's economic statistics system on July 22, 65.9% of newly issued household loans in May carried annual interest rates exceeding 4%. By range, the largest portion, 37.4%, fell into the “4% to 4.5% per annum” bracket. This was followed by “4.5% to 5%” at 14.4%, and “over 5% per annum” at 7.3%.

The share of loans with rates above 4% was only about 42% as of May last year—below half. However, as this proportion surged rapidly, it rose 23.9 percentage points in a single year. In particular, the share in the “4.5% to 5%” range expanded from 4.9% to 14.4%, while the proportion of loans with annual rates above 5% also jumped from 9% to 14.1%. This indicates that the interest burden for borrowers is increasing correspondingly.

The rapid rise in high-interest loan proportions is due to a sharp climb in household loan rates such as mortgages. Even though the base rate was maintained at 2.50% per annum for one year through May, the average mortgage loan rate increased from 3.87% to 4.32% over the same period. This stems from heightened market expectations for a base rate hike as well as banks conservatively setting lending rates to manage total household loan balance.

The increase in unsecured loans, which typically carry higher interest rates, also contributed to the jump in high-interest loans. The outstanding balance of unsecured loans at the five major banks (KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, NH Nonghyup Bank) rose by 5.3559 trillion won, from 103.3145 trillion won in May last year to 108.6704 trillion won in June of this year.

The problem is that the proportion of high-interest loans is likely to keep rising. This month, the Bank of Korea raised its base rate to 2.75% per annum, marking the first monetary tightening in three and a half years. As the central bank has signaled its intention to maintain a rate hike stance until inflation stabilizes, the possibility of further increases within the year has grown. While bank bond rates, which are linked to mortgage loan rates, have largely factored in this policy shift, there is still room for further increases, according to analysts.

Another worry stems from the increase in total household loan balances last month. The total household loan balance at the five major banks reached 774.9608 trillion won at the end of last month—over 4 trillion won higher than the previous month. Of this, unsecured loans increased by 2.155 trillion won.

Banks are sounding the alarm as the scale of household loans in the first half of this year has already exceeded management targets, making total volume management critical. Currently, mortgage loan limits are being reduced, and in order to meet control targets, banks may also cut preferential rates or raise lending rate spreads.

As of the end of May, mortgage loan rates (based on 5-year fixed rates) stood at 4.26% to 7.10% per annum; by the end of June, they had risen to 4.37% to 7.37%, and as of this month, the range climbed further to 4.77% to 7.54% per annum.

An official from the financial sector stated, “The lower bound of mortgage loan rates has now exceeded 4.5% per year, and the upper bound for unsecured loan rates is set in the high 5% range. The proportion of loans with rates above 5% is likely to increase going forward.”

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