Accelerating Rise in Loan Interest Rates... "Today Has the Lowest Interest" (Comprehensive)

If the Base Interest Rate Increases Further, Interest Burden Rises

[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 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 expected 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 tightening of household loans by financial authorities, mortgage and credit loan interest rates are rising sharply. With rates climbing to the mid-4% to 5% range, borrowers’ interest burdens have increased, and the unusual speed of a 0.2 percentage point rise in just one day is notable. With the Bank of Korea’s rate hike this month becoming a foregone conclusion and bank loan regulations expected to tighten further next year, the anxiety among those who have borrowed heavily (Yeongkkeul) or invested with debt (Debt Investment) is growing.

According to the banking sector on the 2nd, KB Kookmin Bank’s credit 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 the 31st of last month. 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 KB Kookmin Bank official explained, “Bond yields have been soaring recently, causing loan rates to rise. The one-year bank bond yield rose by 0.21 percentage points in just one week, and this impact was reflected in the loan rate increase.”

◆ Mortgage loan rates exceeding 5%... Increased interest burden during rate hike period = Comparing the credit loan interest rates for September execution announced by the four major banks?Kookmin, Shinhan, Woori, and Hana?to the Bankers Association, which were around 2.81% to 3.63%, up about 0.7 percentage points from 2.49% to 2.95% a year ago, indicates that the pace of loan rate increases in the banking sector is accelerating recently.

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

If the Bank of Korea raises rates again this month, borrowers’ interest burdens will inevitably increase further. Industry insiders point out that while the rise in bank bond yields amid the rate hike atmosphere is problematic, the reduction of preferential rates previously applied to existing borrowers due to financial authorities’ lending regulations also amplifies the perceived increase in loan interest rates.

◆ Even if borrowers want to reduce debt to ease interest burdens, it’s not easy = 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 phases of the borrower-level 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 bank official said, “Marginal borrowers will try to repay debt 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.” He added, “The fact that borrowers’ interest burdens could lead to a contraction in consumer spending is a matter of concern.”

Meanwhile, despite the chain tightening of loans and interest rate hikes in the banking sector, the increase in household loans last month was somewhat reduced but not significantly. At the end of last month, the outstanding household loans of the five major commercial banks totaled 706.3258 trillion KRW, an increase of 3.4381 trillion KRW from 702.8877 trillion KRW at the end of September. The increase was smaller than the 4.0728 trillion KRW in September but similar to the 3.5067 trillion KRW in August.

The outstanding mortgage loans of the five major banks at the end of October were 501.2163 trillion KRW, up 3.7989 trillion KRW from 497.4174 trillion KRW at the end of September. Although this is a smaller increase than the record monthly rise of 4.0026 trillion KRW in September, it is similar to the 3.8311 trillion KRW increase in August, indicating that the upward trend in mortgage loans has not yet been curbed.

However, credit loans at the five major banks have clearly turned to a decline. The outstanding balance at the end of October was 140.8279 trillion KRW, down 171.9 billion KRW from 140.9999 trillion KRW at the end of September. This is interpreted as reflecting the impact of banks reducing credit loan limits to annual income levels and limiting most overdraft account limits to 50 million KRW.

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