[Global Rate Shock] From Mortgages to Auto Financing and Card Loans... Concerns Mount Over Successive Loan Rate Hikes, Households Under Pressure

Yields on Treasury and Bank Bonds Jump 100bp Since Early Year
Financial Institutions' Funding Costs Surge
Concerns Mortgage Rates May Approach 8% This Year... Auto Loans and Emergency Financing Also Rising
Rising Interest Burdens Threaten to Weaken Household Spending

With the surge in global bond yields driven by the United States, a warning light has been turned on for domestic households and companies already under pressure from high interest rates as they seek to raise funds. Soaring yields on U.S. 10-year Treasury bonds surpassing 4.8% and Japanese 10-year government bonds breaking past 3% are pushing up domestic fundraising rates amid a global "interest rate shock." Although the sharp uptrend in long-term U.S. Treasury yields has eased for now, anxiety persists. Concerns have been raised that interest burdens on households will increase on home mortgage loans, auto financing, card loans, and other borrowing, which may in turn dampen consumption.

According to the Bond Information Center at the Korea Financial Investment Association on the 3rd, the interest rate on 5-year bank bonds (AAA, unsecured) was 4.498% per annum on the 2nd, up by 6 basis points (1bp = 0.01 percentage point) from the previous trading day’s 4.438%. Compared to earlier this year (3.497%), this represents a surge of about 100bp in just 8 months. The 3-year Treasury bond yield also rose to 3.935% per annum, up by more than 100bp from 2.925% at the beginning of the year.

The rise in domestic bond yields has been driven by the upward trend in global long-term rates. As government bond yields across major economies climb simultaneously, there is increasing selling pressure in the Korean bond market. The global bond markets are facing heavier supply-and-demand burdens due to a combination of factors, including persistent U.S. fiscal deficits that increase Treasury supply, concerns about inflation stemming from the Middle East, the possibility that high rates may persist, and large-scale corporate bond issuances by Big Tech firms to fund investments in artificial intelligence (AI).

The shockwaves from rising global long-term interest rates are spreading rapidly through the domestic financial markets, from government bonds to bank bonds, specialized credit finance company bonds, and corporate bonds, impacting private sector fundraising. The resulting increase in funding costs for financial institutions is expected to be passed along as higher loan rates for households. As of the 2nd, the fixed-rate mortgage loan rates of the five major commercial banks were in the range of 4.74% to 7.12% per annum, compared to 3.77% to 5.87% at the start of the year; the lower end has risen by 0.97 percentage points, and the upper end by 1.25 percentage points. If the trend of rising bond yields continues, some market participants expect that the upper limit for mortgage rates could approach or even exceed 8% per annum. In particular, the five-year fixed-rate mortgage loans, which are based on bank bond yields, tend to swiftly reflect movements in market interest rates. The adjustable-rate mortgages, whose rates are linked to the COFIX (Cost of Funds Index)—which takes into account savings, time deposits, and the cost of bank bond funding—could also rise with a lag as the funding cost index increases.

The burden on borrowers could become even heavier. For example, if someone takes out a loan of 500 million won from a bank, the simple annual interest (excluding principal repayment) would be 29.35 million won if the interest rate is at the early-year upper bound for fixed-rate mortgages of 5.87%. If the rate rises to 8%, the annual interest expands to 40 million won, an increase of 10.65 million won per year. Given that the total household loan balance at the five major banks stood at 782.1192 trillion won as of the end of August, a prolonged rise in market rates could erode households’ capacity for consumption.

This issue is not confined to mortgage loans alone. Card companies and capital companies also face higher funding costs as the yields for specialized credit finance bonds rise, which in turn puts upward pressure on auto installment loan rates and card loan rates. With the Bank of Korea having raised the base rate in both July and August of this year by 0.25 percentage points each to reach 3.0% per annum, and with global long-term rates rising in tandem, all major financial costs households must bear—from home purchases, to auto financing, to emergency loans—could go up in sequence.

The underlying problem is that upward pressure on rates is unlikely to subside anytime soon. Not only is there the potential for additional base rate hikes by the Bank of Korea, but there is also growing concern that the U.S. may maintain its high-rate environment for an extended period, further pushing up domestic market rates. In the U.S. interest rate futures market, more than 60% are pricing in the possibility that the Federal Reserve will raise its benchmark rate this month by 0.25 percentage points from the current 3.50–3.75% per annum.

According to a financial industry official, "If the U.S. undertakes additional rate hikes and long-term yields remain high, the upward pressure on domestic market rates can persist independent of the Bank of Korea's monetary policy decisions. Higher financial costs for both households and companies can restrict both consumption and investment, adding to the burdens across domestic demand and the broader economy."

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