'Interest Rate Counterattack' Emergency for Yeongkkeul and Debt Investment Groups... How to Handle Interest Burden?

End of the 'Ultra-Low Interest Rate Era'... Accelerated Normalization of Monetary Policy Until Next Year

The era of near-zero interest rates that began after the COVID-19 crisis has come to an end after 1 year and 8 months. On the 25th, the Monetary Policy Board of the Bank of Korea held a meeting to decide on monetary policy direction and raised the base interest rate by 0.25 percentage points from 0.75% to 1%. The photo shows a loan-related notice posted on the exterior wall of a bank in downtown Seoul on the same day. Photo by Moon Honam munonam@

[Asia Economy Reporter Kim Jin-ho] The so-called 'debt investment (debt-fueled investment) and all-in loan' groups, which had spread like a trend amid the ultra-low interest rate environment, are now facing a crisis. This is because the U.S. Federal Reserve (Fed) has indicated three interest rate hikes next year, signaling a sharp rise in domestic loan interest rates as well.

With the Bank of Korea (BOK) expected to raise its benchmark interest rate as early as next month, mortgage loan interest rates are projected to surpass an annual 6%, and unsecured loan interest rates to exceed an annual 5% by early next year at the latest. There are concerns that the rapid increase in loan interest rates will significantly raise borrowers' interest burdens.

According to the financial sector on the 18th, the market has already accepted the BOK's additional benchmark rate hike next month as a foregone conclusion. This would be the second increase in just two months since November (0.75% → 1.00%).

The BOK has repeatedly hinted at the possibility of further hikes, citing excessive debt growth causing financial imbalances and strong inflationary pressures. Especially as the U.S. has clearly signaled at least three rate hikes next year and a swift shift to a tightening stance, the environment is being created where the BOK has no choice but to take preemptive action by raising its benchmark interest rate.

Ahead of the additional benchmark rate hike, the market is already stirring. For example, the COFIX, a benchmark interest rate for new variable-rate mortgage loans, surged by 0.26 percentage points in November to 1.55% compared to the previous month. This is the highest level since December 2019 (1.60%), before the COVID-19 outbreak, after a steep rise starting in June. Notably, this monthly increase is the largest ever recorded since related statistics began in 2010.

Accordingly, variable-rate mortgage loan interest rates at banks have all risen simultaneously since the 16th. KB Kookmin Bank's mortgage loan rates increased from 3.59?4.79% per annum to 3.85?5.05%, with the upper limit reaching the 5% range. Woori Bank also raised rates from 3.58?4.09% to 3.84?4.35%. NH Nonghyup Bank, Shinhan Bank, and Hana Bank saw similar rate increases.

If the BOK raises the benchmark interest rate in January next year, market interest rates will be pushed up rapidly, and this upward trend in loan interest rates is expected to accelerate further. In fact, when the benchmark rate was raised once in August, major loan interest rates surged by up to 1 percentage point. A financial sector official said, "As monetary policy normalization is clearly on a fast track, loan interest rates are set to continue rising steadily."

The problem lies in borrowers' interest burdens. More than 80% of mortgage loan borrowers have variable interest rates, and investors who engaged in so-called debt investment through unsecured loans are now facing an emergency. The era when 'all-in loans or debt investment' was possible has come to an end due to the increased interest burden.

For example, a borrower who took out a 300 million KRW mortgage loan in August with a 30-year term at 4% interest would pay about 1.43 million KRW monthly. However, if the interest rate approaches 6% later, the borrower would have to pay about 1.8 million KRW monthly. This means a difference of 300,000 KRW per month in interest burden within just 3 to 4 months.

Meanwhile, the 'loan shortage' phenomenon is expected to continue next year as well. From the borrowers' perspective, a double hardship is anticipated following the interest rate hikes. According to the financial sector, major commercial banks' household loan growth management targets for next year are set at 4.5?5%, which is stricter than this year. The situation is similar for secondary financial institutions such as savings banks and Saemaeul Geumgo.

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