"Mortgage Loan Interest Rate Breaks 7%... The Future Is Even More Problematic" [Interest Poor Era]

Fixed Interest Rates for Our Apartment Loans at 5.40~7.10%... Surpassing 7%
Fixed Rate Ceiling Expected to Reach 8% Within the Year, Variable Rate at 6% Also Forecasted "Interest Rate Hikes to Continue Until First Half of Next Year"

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] The upper limit of mortgage loan interest rates at commercial banks has surpassed 7%. This is due to central banks around the world raising benchmark interest rates in response to the global inflation surge. As benchmark rate hikes are expected to continue in the second half of the year, concerns are emerging in the financial sector that the highest mortgage loan interest rates could reach the 8% range by the end of this year or early next year. This implies that borrowers' interest burdens are also expected to increase significantly.

According to the financial sector on the 16th, the fixed (hybrid) interest rate for Woori Bank's representative mortgage loan product, 'Woori Apartment Loan,' was recorded at 5.40~7.10% as of that day. The upper limit (6.97%) rose by 0.13 percentage points compared to just the previous day.

The mortgage loan interest rate exceeding 7% is due to the rapid rise in the 5-year bank bond rate, which serves as the benchmark for hybrid mortgage loan rates. According to the Korea Financial Investment Association, the 5-year AAA-rated bank bond rate was 4.082% as of the previous day, marking the highest level in about 10 years since 2012. The 1-year bank bond rate, which serves as the benchmark for unsecured loans, also surpassed 3%, reaching 3.184%.

The situation is no different for variable mortgage loan interest rates. As of that day, the upper limit of variable mortgage loan rates at the four major commercial banks was 5.632%, approaching the 6% range. The rise in variable rates is due to the May COFIX (Cost of Funds Index) announced the day before. The COFIX (based on new contracts), which serves as the benchmark for variable rate loans in the banking sector, rose by 0.14 percentage points to 1.98%, the highest level in over three years since January 2019 (1.99%).

The financial sector is expressing concerns that "the future is even more problematic." On the 15th (local time), the U.S. Federal Reserve's Federal Open Market Committee (FOMC) implemented a so-called 'giant step' by raising the benchmark interest rate by 75 basis points (1bp=0.01%) to curb inflation. The Bank of Korea is also likely to follow suit with a comparable rate hike.

JP Morgan forecasted in a report the day before that the Bank of Korea would take a 'big step' by raising the benchmark interest rate by 50 basis points next month to respond to inflation, followed by 25 basis point hikes in August, October, and November, bringing the year-end benchmark rate to around 3.0%. Samsung Securities also expects the Bank of Korea to raise rates by 25 basis points in August and October following the big step next month, projecting the year-end benchmark rate at 2.75%.

Accordingly, the funding conditions for commercial banks are expected to tighten further, fueling loan interest rate increases. While deposits and savings are surging due to the benchmark rate hikes, the outflow of low-cost deposits, which have expanded the interest margin for commercial banks, is predicted to accelerate. For commercial banks, the more low-cost deposits leave, the more they have to increase funding through bank bonds. This naturally affects the secondary financial sector, such as card companies and capital firms, which rely on bond issuance for funding without deposit functions.

Kiwoom Securities recently analyzed in a report, "The reason commercial banks have been increasing bank bond issuance recently is to fill the funding gap caused by the outflow of low-cost deposits amid rising market interest rates," adding, "If the outflow of low-cost deposits intensifies, it could trigger increases in bank bond rates and, consequently, interest rates for card companies and capital firms."

Therefore, the financial sector expects that by the end of this year or early next year, mortgage loan interest rates will exceed 8% for fixed (hybrid) rates and 6% for variable rates. The interest burden on borrowers who have taken out household loans, such as the 'Young-kkeul' generation, is expected to worsen. Professor Kim Sang-bong of Hansung University's Department of Economics stated, "Continuous benchmark rate hikes are inevitable at least until the first half of next year," adding, "The benchmark rate could rise to around 4% next year, and the upper limit of loan interest rates could increase to around 10% accordingly."

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