"How Much Is Left?" Wages Eaten Up by Mortgage and Auto Installments... Struggling Households Amid Global Rate Shock

From Mortgages to Auto Installments and Card Loans
Concerns Grow Over a Series of Interest Rate Hikes on Household Loans
Government and Bank Bond Yields Jump 100bp Compared to Early This Year
Financial Institutions Face Soaring Funding Costs
Mortgage Rates Could Approach 8% This Year... Ripples Hit Auto Installments and Emergency Loans
Will Surging Interest Burdens Further Suppress Household Consumption?

Due to the sharp rise in global bond yields driven by the United States, alarm bells have begun to ring regarding funding for domestic households and companies, which are already struggling under high interest rates. As the yield on the 10-year U.S. Treasury bond surpasses 4.8% per annum and the 10-year Japanese government bond yield exceeds 3% per annum, this global "rate shock" is pushing up domestic borrowing costs. Although the rapid surge in U.S. long-term Treasury yields has temporarily eased, concerns remain. There are growing worries that interest burdens on households—through mortgage loans, auto installment plans, and card loans—may increase further, which could also suppress consumption.

According to the Bond Information Center at the Korea Financial Investment Association on September 3, the five-year (AAA, unsecured) bank bond yield stood at 4.498% per annum as of September 2, up 6 basis points (1bp = 0.01 percentage points) from the previous trading day (4.438%). Compared to the beginning of the year (3.497%), it has jumped by around 100bp over eight months. The three-year government bond yield also surged to 3.935% per annum, an increase of over 100bp from 2.925% at the start of the year.

The uptick in domestic bond yields is primarily driven by the rise in global long-term interest rates. As government bond yields in major economies rise in tandem, the sell-off pressure in Korea’s bond market is also intensifying. The increased supply of U.S. Treasury bonds due to persistent fiscal deficits, inflation concerns stemming from the Middle East, the prospect of prolonged high interest rates, and the large-scale issuance of corporate bonds by major technology companies for artificial intelligence (AI) investment are combining to create significant supply-demand pressure in the global bond markets.

The shock from the rise in global long-term interest rates is quickly spreading from domestic government bonds to bank bonds, bonds from specialized credit finance companies, and corporate bonds—rapidly affecting the private sector funding market. The increased funding costs for financial institutions are expected to be passed on to household lending rates. As of September 2, the fixed-rate mortgage interest rates at the five major commercial banks stood at 4.74–7.12% per annum, up from 3.77–5.87% at the start of the year: the lower bound rose by 0.97 percentage points and the upper bound by 1.25 percentage points. In the market, there is even speculation that if the rise in bond yields continues, the upper bound of mortgage rates could approach or exceed 8% per annum. In particular, the five-year fixed-rate mortgage, which uses bank bonds as its benchmark, tends to reflect market rate movements relatively quickly. For variable-rate mortgages, if the Cost of Funds Index (COFIX), which reflects banks’ funding costs such as savings, time deposits, and bank bonds, rises, mortgage rates may follow suit, albeit with some lag.

The burden felt by borrowers could grow even heavier. Suppose a borrower takes out a KRW 500 million bank loan. If the annual interest rate is at the upper end of fixed-rate mortgages at the beginning of the year (5.87%), the simple annual interest, excluding principal repayment, would be KRW 29.35 million. However, if the rate climbs to 8% per annum, this figure jumps to KRW 40 million, an annual increase of KRW 10.65 million. Considering the five major banks’ outstanding household loans amounted to KRW 782.1192 trillion at the end of August, if the upward trend in market interest rates persists, it could erode households’ disposable income and consumption capacity.

This issue is not confined to mortgages. Credit card and capital companies also face higher procurement costs if their bond yields rise, intensifying pressure to increase lending rates for auto installment plans and card loans. With the Bank of Korea having already raised the benchmark rate by 0.25 percentage points each in July and August this year, bringing it up to 3.0% per annum, the combined effect of rising global long-term rates could lead to increasing financial expenses for households—from purchasing homes to auto installments and emergency loans.

The problem is that the pressure for higher rates is unlikely to subside in a short period. There is growing caution that, in addition to a possible further benchmark rate hike by the Bank of Korea, the persistence of high interest rates in the U.S. could continue to push up domestic market rates. In the U.S. interest rate futures market, the probability priced in for the Federal Reserve to raise its benchmark rate by 0.25 percentage points—from the current range of 3.50–3.75% per annum—this month exceeds 60%.

A financial industry official commented, "If U.S. long-term rates remain elevated due to additional rate hikes, upward pressure on domestic market rates may persist, regardless of the Bank of Korea's monetary policy decisions. The resulting increase in financial expenses for households and businesses could simultaneously dampen both consumption and investment, weighing on the broader domestic economy and overall economic activity."

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