"Yeonggeuljok" Hit Again... Lending Rates Surge and Interest Burden Snowballs [3% Rate Aftershock] ①

Upper Limit of Fixed-Rate Mortgages Up 0.92 Percentage Points This Year
Variable Rates Likely to Rise as COFIX Trends Upward
Unsecured Loan Rates on the Verge of Surpassing 6%

As the Bank of Korea has raised the base interest rate for the second consecutive month, it is expected that loan interest rates in the financial sector will also follow suit with increases. Consequently, the interest burden is likely to grow substantially for so-called 'Yeongkkeuljok' (people who have stretched their finances to the limit to buy homes) and 'Bittu-jok' (those investing aggressively with borrowed money).

According to the financial industry on August 28, the five major commercial banks (Shinhan Bank, KB Kookmin Bank, Hana Bank, Woori Bank, and NH Nonghyup Bank) currently offer five-year fixed-rate mortgage loans at an annual interest rate ranging from 4.82% to 7.15%. Compared to the year-end figures of last year (3.93% to 6.23%), the lower end increased by 0.89 percentage points and the upper end by 0.92 percentage points.

As the Bank of Korea has raised rates rapidly, some forecast that the upper end of fixed-rate mortgages could exceed 8% before the end of the year. According to the Korea Financial Investment Association's Bond Information Center, the yield on five-year financial bonds, which serves as the benchmark for fixed-rate mortgage loans, stood at 4.298% as of this date, up by 0.799 percentage points from 3.499% at the end of last year. In a scenario where 300 million won is borrowed at an 8% annual interest rate, the monthly interest alone (excluding principal repayment) would amount to 2 million won, totaling 24 million won annually.

Variable-rate mortgage loans are also highly likely to rise. This is because the COFIX (Cost of Funds Index), which serves as the benchmark for variable-rate mortgage loans, is on an upward trend. According to the Korea Federation of Banks, the new COFIX for last month stood at 3.18% per annum, up from 2.89% in April, 2.90% in May, and 3.05% in June, continuing to climb. COFIX is the weighted average interest rate of funds sourced by eight domestic banks, reflecting changes in the interest rates of deposits, savings, and bank bonds. Immediately after the Bank of Korea raised the base rate last month, the five major commercial banks increased their deposit and savings interest rates by 0.2 to 0.3 percentage points across the board. Some banks are also considering additional increases for deposit and savings rates. As of this date, the variable-rate mortgage loans at the five major banks range from 4.21% to 6.56% annually. Compared to the end of last year (3.77% to 5.87%), the lower end has increased by 0.44 percentage points and the upper end by 0.69 percentage points.

The significant rise in the share of variable-rate mortgages, which are relatively disadvantageous during interest rate hikes, also adds to the burden for borrowers. According to the Bank of Korea, the share of variable-rate loans among newly issued bank mortgage loans last month was 68.1%, up by 5.8 percentage points from 62.3% the previous month, marking nine consecutive months of increase and the highest level since February 2014. The proportion of variable rates among all new household loans also stood at 79.0%. While an increasing number of borrowers are currently choosing variable rates for their relatively lower interest, if loan rates continue to increase, they will have to bear the full brunt of further rate hikes.

Interest rates for unsecured personal loans (based on 6-month financial bonds) are also on the verge of surpassing 6%. As of this date, the upper end of unsecured loan rates among the five major banks was 5.96%, up by 0.01 percentage points from 5.95% the previous day. Personal loans typically have a shorter rate adjustment cycle than mortgage loans, meaning changes in market interest rates are reflected more quickly. As a result, the interest repayment burden for borrowers could increase significantly in a shorter period.

Efforts by banks to manage household lending are also cited as a factor contributing to rising loan interest rates. Although the government has eased this year’s target for household loan growth, banks must continue to manage their annual lending targets. If loan demand keeps rising, it is possible that banks may respond by increasing additional margins or reducing preferential interest rate offers.

However, the Bank of Korea’s recent hint at moderating the pace of further rate hikes could influence the speed at which bank lending rates rise from now on. In the latest statement on monetary policy, the Bank of Korea deleted the previously used phrase about “the need to continue the rate hike stance.” Governor Rhee Chang-yong also mentioned during a press briefing the previous day that, according to the dot plot for the policy rate outlook in six months, the largest number of projections were at 3.25%, adding, “We expect a gradual increase in rates.”

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