Mortgage interest rate rises by 0.2%p in one day... "Today is the cheapest interest"

If the Bank of Korea Raises Interest Rates Again This Month,
Borrowers' Interest Burden Will Increase Further

[Asia Economy Reporter Park Sun-mi] Office worker Kim Geon-woo (46, pseudonym) opened a 50 million KRW overdraft account at Shinhan Bank last November with an annual interest rate of 3.78%. The interest he paid over one year was 1.89 million KRW. Recently, when renewing the contract, the applied interest rate rose to 4.49%, increasing his interest burden by 350,000 KRW. The problem is that he also has a 200 million KRW mortgage loan with an interest rate that changes annually. The rate, which was 3.84% a year ago, has now surged to 4.5%. The interest he must pay has increased from 7.68 million KRW to 9 million KRW. The additional interest due to the soaring rates amounts to 1.67 million KRW. Kim said, “I want to switch to a fixed rate because the rates are only going to rise, but right now, higher rates apply and the loan limit has been reduced due to strengthened lending regulations, so I am worried.”

Due to the financial authorities tightening household loans, mortgage and unsecured loan interest rates are rising sharply. With rates climbing to the mid-4% to 5% range, borrowers’ interest burdens have increased significantly, and the pace is unusually fast, with a 0.2 percentage point rise in just one day. As the Bank of Korea’s base rate hike this month is becoming a foregone conclusion and bank loan regulations will be further tightened next year, anxiety among those who have borrowed to the limit (Yeongkkeul) or invested with debt (Debt Investment) is intensifying.

According to the banking sector on the 2nd, KB Kookmin Bank’s unsecured loan interest rate as of the previous day was between 3.68% and 4.68% annually, up 0.21 percentage points from 3.47% to 4.47% on August 31. A 0.21 percentage point increase in loan rates in just one day is unusual and reflects the sharp rise in bank bond yields, which form the basis for interest rate calculations. A Kookmin Bank official explained, “Bond yields have been soaring recently, causing loan rates to rise. The one-year bank bond yield increased by 0.21 percentage points in just one week, and this effect has been reflected in the loan rates.”

Comparing this to the unsecured loan interest rates for September execution announced by the four major banks?Kookmin, Shinhan, Woori, and Hana?to the Bankers Association, which ranged from 2.81% to 3.63%, up about 0.7 percentage points from 2.49% to 2.95% a year ago, it indicates that the pace of loan rate increases in the banking sector is accelerating recently.

As of the previous day, the unsecured loan interest rates at the four major commercial banks ranged from 3.35% to 4.68%, which is 0.51 percentage points higher than the 3.02% to 4.17% range at the end of August, right after the Bank of Korea’s first base rate hike. The new COFIX-based variable-rate mortgage loans are currently at 3.31% to 4.81%, up 0.62 percentage points from 2.62% to 4.19% two months ago. For mixed (fixed) mortgage products with slightly higher rates, some already have annual interest rates exceeding 5%, raising concerns that rates could soon surpass 6%.

If the Bank of Korea proceeds with an additional rate hike this month, borrowers’ interest burdens will inevitably increase further. Industry insiders explain that while the rising bank bond yields amid the base rate hike atmosphere are problematic, the financial authorities’ loan regulations have also reduced preferential interest rates previously applied to existing borrowers by banks, which amplifies the perceived increase in loan interest rates.

The only way for borrowers to reduce their burden is to lower their debt and thus reduce interest payments. However, with the implementation of the second and third stages of the borrower-based total debt service ratio (DSR) in January and July next year, loan limits will be further reduced, making it difficult to repay loans solely based on interest burden considerations.

A banking official said, “Marginal borrowers will try to repay their debts due to interest burdens, but ordinary office workers are likely to bear the interest burden as they fear loans may not be available when needed,” adding, “The fact that borrowers’ interest burdens could lead to a contraction in consumer spending is a matter of concern.”

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