"Should I Sell My Home Bought With Every Penny?" Interest Payment Jumps by KRW 420,000 Overnight—The Changed Household Budget of 38-Year-Old A [Back to the Era of High Interest Rates]

[Financial News] #. A, a 38-year-old office worker, has recently become less pleased when payday arrives. News reports have highlighted robust semiconductor exports and an improved growth outlook, but the economy feels very different to A, who has no connection to the semiconductor industry. A's salary has failed to keep pace with rising living costs, and the time has come to reset the rate on a mortgage taken out at low interest rates five years ago. The pressure has become severe enough to keep A awake at night. A is a hypothetical borrower created to examine how rising interest rates affect an office worker's household. Based on mortgage rates and repayment conditions in the banking sector, this newspaper estimated A's income, loans and savings to analyze the impact of high interest rates.
A's biggest concern is the mortgage taken out five years ago. The fixed-rate period on the hybrid-rate mortgage, which was issued at a rate in the low 3% range, has ended. As a result, A must pay a higher variable rate this year.
According to the financial sector on the 20th, variable mortgage rates at the five major commercial banks—KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank—ranged from 4.32% to 6.33% annually as of the 18th. Compared with the hybrid-rate mortgage rates of 2.82% to 4.43% offered by the four major commercial banks in May 2021, when A took out the mortgage, the lower end has risen by 1.50 percentage points and the upper end by 1.90 percentage points.
A borrowed KRW 400 million from a bank in 2021 to purchase an apartment in the Seoul metropolitan area. The hybrid-rate mortgage has a 30-year term with equal principal-and-interest repayments, applying a fixed rate for the first five years before switching to a variable rate. Assuming A's initial rate was 3.2% annually based on rates at the time, the monthly payment was approximately KRW 1.73 million.
Five years later, the rate reset has arrived, and the repayment burden has instead grown. Assuming a reset rate of 5.3% annually, the monthly payment would rise to approximately KRW 2.15 million. The amount due each month would increase by KRW 420,000, or roughly KRW 5 million a year.
The increase in the base rate is behind the rise in mortgage rates. The BOK's back-to-back hikes in July and August lifted the base rate to 3.00%. Market rates are also trending upward. The five-year bank bond yield (AAA, unsecured), which serves as the benchmark for fixed-rate mortgages, stood at 4.583% annually as of the 16th. 
COFIX (Cost of Funds Index), the reference rate for variable-rate mortgages, has also remained elevated. COFIX based on newly issued loans rose for four consecutive months from April through July, reaching its highest level in one year and seven months. In August, however, it stood at 3.18%, unchanged from the previous month. 
The problem is that the upward trend in interest rates has not ended. Financial institutions expect the current 3.00% base rate to rise as high as 3.75% during this rate-hiking cycle. 
If A's monthly take-home pay is assumed to be approximately KRW 5.5 million, KRW 2.15 million would immediately go toward the mortgage payment as soon as the salary arrives. About KRW 3.35 million would remain. After management fees, utility bills, telecommunications costs, insurance premiums, credit card payments and food expenses, the amount available for savings quickly shrinks.
Ultimately, the first expenses A cuts are discretionary items such as dining out and travel. If that is still not enough, A must reduce the money put into savings plans and investments. Although A's salary has risen compared with five years ago, the amount that can be set aside for the future has actually decreased. Long-term asset planning has also been put on hold. A decided to postpone plans to move to a larger home in a few years. Rather than taking out an additional loan to move, A revised the plan to stay in the current home for the time being and rebuild financial assets. 
Existing homeowners like A, who bought homes during the COVID-19 period by borrowing to the hilt and are reaching the mortgage rate reset point five years later, are facing increasingly difficult decisions. They must weigh how to adjust spending and savings while handling higher interest payments, as well as whether it is still right to hold on to their current homes.   
Financial planner Jo Hyeong-geun said, "If a home is in an area where prices are likely to rise or hold relatively well, homeowners should keep the property even if they have to reduce other savings." He added, "Conversely, if the area's potential for price gains is relatively limited, high interest rates could weaken buying demand and bring additional properties onto the market, creating an opportunity to move to a more desirable area."
As interest expenses rise, more borrowers are seeking to manage their financial assets efficiently. An increasing number are also wondering whether they should reduce risk assets such as stocks and increase their savings allocation during a period of high interest rates. 
Jo explained, "It is risky to assume that investment risk should simply be reduced because interest rates have risen. The economy is currently strong enough to withstand higher rates." He continued, "If you reduce risk assets and the stock market rises afterward, you could miss an investment opportunity. During a period of high interest rates, you need to carefully assess the location of your home, your cash flow and your investment horizon, and adopt different strategies for each asset." 
[email protected] Lee Hyun-jung Reporter