[1mm Finance Talk] Rate Shock from the U.S. Adds to Monetary Tightening... Household Interest Burden Grows

Clear Upward Trend in Lending Rates After Consecutive Key Rate Hikes in July and August

Lower Bound of Mortgage Rates Jumps 0.3 Percentage Points in One Month; Variable-Rate Mortgage Floor Now Averages 4.6%

U.S. Rates Raised for the First Time in Over Three Years; 10-Year Treasury Yield Surpasses 5%

A 0.5 Percentage Point Rise in Lending Rates Could Add 6.5 Trillion Won Per Year to Household Interest Payments

Amid the impact of two consecutive key interest rate hikes and a sharp rise in U.S. Treasury yields, interest rate conditions surrounding households are worsening. The lower bound of mortgage loan rates, which account for the largest share of household interest spending, has jumped by about 0.3 percentage points in just one month, showing a clear upward trend. Even variable-rate mortgages, which are increasingly being chosen within overall home loans due to their relatively lower rates, now have an average lower bound of 4.6%.

The recent increase in the U.S. benchmark interest rate for the first time in over three years has heightened the likelihood of further rises in household lending rates. Concerns are mounting that households will feel an even greater burden from rising interest rates, with the Bank of Korea’s tightening cycle not yet over and banks likely to face increased pressure to manage the total volume of household loans toward the end of the year.

According to an analysis on September 17 of mortgage loan rates at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), the lower end of the rate range has risen by about 0.3 percentage points over the past month.

As of the previous day's announcement, a simple average of six-month variable mortgage rates at the five major banks showed a lower bound of 4.60% and an upper bound of 5.84%. This compares to 4.34% and 5.79%, respectively, as of August 19, marking a 0.26 percentage point increase in the average lower bound in one month. This reflects the fact that the Cost of Funds Index (COFIX)—the key standard for variable-rate mortgages—rose for four consecutive months from April to July, reaching 3.18%. The COFIX for newly issued loans in August remained at 3.18%, the same as the previous month.

The lower bound of five-year fixed-rate mortgages at the five major banks has also climbed to the mid-5% range, with their average now at 5.37%–6.60%. Compared to one month ago (5.10%–6.53%), the lower bound has increased by 0.27 percentage points. The yield on five-year bank bonds, which serves as a benchmark for fixed mortgage rates, has already exceeded 4.5%.

Fixed-rate mortgage rates did not show much increase—or even fell slightly—immediately after the benchmark rate hike in July, due to earlier market anticipation. However, with two consecutive benchmark rate hikes, the upward trend has become pronounced. In addition to monetary tightening at home, a spike in U.S. Treasury yields has also played a role. As U.S. Treasury yields have climbed, domestic Treasury bond yields have also risen, placing additional upward pressure on local bank bond rates. As of September 15, the yield on five-year bank bonds was 4.655%, the highest since November 1, 2023 (4.734%).

Amid these conditions, there are growing concerns that some banks’ lending margins are hovering close to 3%, further increasing household interest burdens. Currently, the average lending margin is 2.49% (ranging from 2.08% to 2.91%) for six-month variable-rate mortgages, and 2.02% (ranging from 1.75% to 2.31%) for five-year fixed-rate mortgages.

The key issue is that the interest rate environment for households is likely to remain challenging going forward. First, the Bank of Korea’s rate hike cycle is not over. At the latest rate decision, Shin Hyunsong, Governor of the Bank of Korea, revealed that, for the current benchmark rate of 3.0% per annum, the median of the Monetary Policy Committee’s forward projections six months out is 3.25%. This signals a possibility of at least one further rate hike from the current level.

On top of this, the U.S. Federal Reserve’s rate hike has emerged as a new variable. On September 16 (local time), the Fed raised its benchmark rate by 0.25 percentage points to a range of 3.75–4.00%—the first increase since July 2023, or in three years and two months. The newly released dot plot also reflected the possibility of an additional hike later this year. As a result, the timing of a further rate hike by the Bank of Korea may be affected, and the rise in U.S. Treasury yields could add extra upward pressure on both domestic government bond yields and bank bond rates.

This could further increase household interest burdens. According to materials submitted by the Bank of Korea to Assemblyman Han Changmin of the Social Democratic Party, a 0.5 percentage point rise in lending rates is estimated to raise households’ annual loan interest burden by 6.5 trillion won. The annual interest burden for the self-employed would rise by 3.6 trillion won, and mortgage borrowers’ interest burden would increase by 3.7 trillion won, respectively.

An industry insider commented, "There is a high possibility that the COFIX will be raised again in October, and as we approach the end of the year, banks may further tighten their household debt management. With little room for rates to fall, the degree of interest-rate burden felt by households is likely to increase going forward."

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