"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 its base rate for the second consecutive month, lending rates in the financial sector are also expected to increase. Interest burdens for so-called "Youngkkeuljok" and "Bittoojok"—terms referring to homebuyers who have maximized their borrowing and individuals investing with loans—are likely to rise further.

According to the financial sector on August 28, as of this day, the five major commercial banks (Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup) offered five-year fixed-rate mortgage loans at annual rates ranging from 4.82% to 7.15%. Compared to the end of last year, when the rates were between 3.93% and 6.23%, the lower end has risen by 0.89 percentage points and the upper end by 0.92 percentage points.

Given the rapid pace at which the Bank of Korea has raised rates, there are now forecasts that the upper end of the fixed-rate mortgage loan could surpass 8% within this year. According to the Korea Financial Investment Association's Bond Information Center, the five-year financial bond yield, which serves as the benchmark for fixed-rate mortgage loans, stood at 4.298% on this day, up 0.799 percentage points from 3.499% at the end of last year. If one were to borrow 300 million won at an 8% annual rate, simple monthly interest payments alone would reach 2 million won, or 24 million won for the year, excluding principal repayment.

There is also a strong likelihood that variable-rate mortgage loan rates will rise. This is because the Cost of Funds Index (COFIX)—the benchmark for variable-rate mortgage loans—continues to climb. According to the Korea Federation of Banks, the new transaction COFIX for the previous month was 3.18% on an annualized basis. It has been steadily increasing after recording 2.89% in April, 2.90% in May, and 3.05% in June. COFIX is the weighted average interest rate of funds raised by eight domestic banks and reflects changes in deposit, savings, and bank debenture rates. Immediately following last month's base rate hike by the Bank of Korea, the five major commercial banks simultaneously raised their deposit and savings rates by 0.2 to 0.3 percentage points. Some banks are again considering raising deposit and savings rates. As of this day, the five major commercial banks' variable-rate mortgage loans stood at 4.21% to 6.56%. Compared to 3.77% to 5.87% at the end of last year, the lower end rose by 0.44 percentage points and the upper end by 0.69 percentage points.

The increased proportion of variable-rate mortgages—which are relatively disadvantageous in a rising rate environment—is also adding to borrowers' burdens. According to the Bank of Korea, among new mortgage loans issued by banks last month, 68.1% were variable-rate, up 5.8 percentage points from 62.3% the previous month. This marks the ninth consecutive monthly increase and is the highest level since February 2014. The proportion of variable-rate loans among all new household loans also stood at 79.0%. While more borrowers are currently opting for variable rates—which are lower for now—any sustained increase in lending rates will directly impact these borrowers as they must absorb the full rate hikes.

Interest rates for unsecured (credit) loans, based on six-month financial bonds, are also on the verge of surpassing 6%. On this day, the upper end of credit loan rates at the five major banks reached 5.96%, up 0.01 percentage point from 5.95% the previous day. Credit loan rates typically adjust more quickly than mortgages in response to changes in market rates, so the burden of interest payments for borrowers can intensify in a short time frame.

Efforts by banks to manage household lending have also been cited as a factor in the rise of loan rates. Although the government has relaxed its household credit growth target for this year, banks still need to control lending to meet their annual targets. If loan demand continues to grow, banks may respond by raising their lending spreads or reducing preferential rates.

However, the Bank of Korea has hinted at moderating the pace of additional rate increases, which could influence the speed at which bank lending rates rise in the future. In the latest monetary policy statement, the expression that "there is a need to maintain the current rate hike stance" was omitted. Bank of Korea Governor Rhee Chang-yong also mentioned at a press briefing the previous day that in the dot plot projecting the base rate six months from now, most projections were at 3.25%, adding that he "expects a gradual upward trend."

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