Mortgage Rates Could Top 8%... Tightening Policy Also Widens the Burden on Vulnerable Borrowers

[Financial News] As the Bank of Korea (BOK) has raised its benchmark interest rate twice in a row, borrowers are expected to face a heavier interest burden. Household Credit has surpassed 2,000 trillion won for the first time, and the share of borrowers who recently chose variable-rate mortgage loans has also risen sharply, raising concerns about broader fallout.
According to the financial sector on the 27th, the five-year hybrid mortgage rates at the Five Major Commercial Banks — KB Kookmin Bank, Shinhan Financial Group, Hana, Woori Bank and NH NongHyup — stood at 4.72% to 7.04% per year as of that day.
As the BOK is expected to maintain its tightening stance for the time being, upward pressure on market rates is likely to continue. Some observers say mortgage rates could even exceed 8% at the upper end. At present, the five-year fixed mortgage rates at the five major banks are in the 4.72% to 7.17% range.
The five-year bank bond yield, which serves as the benchmark for fixed-rate mortgages, stood at 4.359% as of the 26th. The yield had risen to the 4.4% range last month, then eased to the 4.2% range earlier this month, but it has recently resumed its upward trend. COFIX, the benchmark rate for variable-rate mortgages, also rose 0.13 percentage point from a month earlier to 3.18% on a new lending basis last month. It has climbed for four straight months and is at its highest level in one year and nine months.
The impact of higher rates is expected to be even greater when combined with the scale of Household Credit, which has exceeded 2,000 trillion won. Outstanding Household Credit at the end of June stood at 2,019.8 trillion won, breaking the 2,000 trillion won mark for the first time since related data began to be compiled. It increased by 25.9 trillion won from the previous quarter, marking the largest gain since the third quarter of 2021.
Another concern is that the number of borrowers choosing variable rates has surged this year. According to ECOS, the share of variable-rate mortgages among new loans last month reached 68.1%, the highest since February 2014. Borrowers who opted for lower rates than fixed-rate loans now face a greater chance of being hit with higher rates when their loans are repriced. For so-called "all-in" borrowers and "debt investors" who borrowed more to invest in real estate, stocks or virtual assets, continued rate hikes will make it increasingly difficult to avoid a heavy interest burden.
In fact, according to data submitted by the BOK to Lee Jong-wook of the People Power Party, every 0.25 percentage point increase in loan rates raises the annual interest burden for mortgage borrowers by about 180 billion won. On a per-person basis, that translates into an additional 296,000 won a year.
A banking industry official explained, "Even if the benchmark rate rises, existing borrowers do not see their loan rates increase immediately. But if market rates keep climbing, the interest burden will grow for borrowers whose repricing dates come up first."
[email protected] Seo Ji-yoon Reporter