130,000 Youth "All-In" Borrowers Facing Mortgage Rate Recalculation Say "Sleepless Nights"

Up to 2%P Jump in a Year
Bank of Korea Signals Continued Rate Hikes Through Year-End
Mortgage Rates May Surpass 7%

House Prices Plummet Starting from Seoul Outskirts
Where 2030 Buyers Are Most Active

[Asia Economy Reporter Kim Hye-min] Mr. A, a man in his 30s who borrowed 500 million KRW through unsecured loans and mortgage loans to prepare a house before his wedding a year ago, has recently been unable to sleep at night. This is because the Bank of Korea raised the base interest rate by 0.5 percentage points at once ahead of the mortgage loan interest rate reassessment at the end of August. With unsecured loan interest rates rising twice within a year, the monthly loan interest, which was 1.65 million KRW, has already increased to 1.8 million KRW. If the mortgage loan interest rate, which accounts for a larger portion, also soars, he will have to spend most of his salary repaying the loan interest. Mr. A said, "I am reconsidering my asset portfolio, wondering if I should sell my stocks, which are in the red, to repay part of the loan because I cannot afford the interest," adding, "The burden of loan interest is increasing, but house prices are actually falling, so I am practically in a panic."

As market interest rates rise sharply, the worries of young people in their 20s and 30s who have gathered loans on all their assets to buy their own homes are deepening. The most immediately affected are young "Yeongkkeuljok" (those who borrow to the limit, even their soul) with one-year variable-rate mortgage loans whose reassessment is imminent. It is estimated that about 130,000 people belong to this group based on the four major commercial banks: Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank.

◆ Interest rates rose 2 percentage points in one year, but could reach 7% by year-end? ... Growing sighs among 20s and 30s = According to the 'New Approval Status of 2030 Mortgage Loan Interest Rate Types' received on the 15th by Rep. Kim Sang-hoon of the People Power Party from the Financial Supervisory Service, the number of new approvals for variable-rate mortgage loans at the four major banks from August to December last year was 138,660. Simply put, this is the scale of mortgage loans that will be reassessed from next month until the end of the year after one year has passed. The total number of young people who took out mortgage loans during this period was 180,975, with a variable interest rate ratio of 76.6%.

Most of them are "Yeongkkeuljok" who gathered loans to buy a house. This is because their income levels are relatively low, so the impact of the rapid interest rate hike is inevitably greater. In particular, the Moon Jae-in administration partially eased loan regulations for actual buyers from July last year, leading to more young people taking out mortgage loans during this period. At that time, the government raised the loan-to-value (LTV) ratio preferential treatment for non-homeowners who are actual buyers by 10 percentage points, and also raised the housing price limit for loans in speculative overheated districts from 600 million KRW to 900 million KRW, allowing up to 400 million KRW to be borrowed. The number of new mortgage loan approvals, which was about 34,000 before the measure was implemented, increased to 42,586 in August.

However, with the Bank of Korea's consecutive base rate hikes in the first half of this year, they have been directly affected by the pressure of rising interest rates. The base rate, which was 0.5% in July last year, has been raised six times in August and November of that year, and January, April, May, and this month of this year, reaching 2.25%. During this period, mortgage loan interest rates rose from 2.81% to 3.9% as of May, and are expected to rise further due to the Bank of Korea's big step (0.5 percentage point hike). Currently, the variable mortgage loan interest rates at the four major commercial banks range from 3.74% to 5.68%. Compared to last year when the base rate was 0.5%, the upper limit of interest rates has risen by more than 2 percentage points.

The problem is that the trend of interest rate hikes may continue for some time. Bank of Korea Governor Lee Chang-yong said, "Even if the interest rate is raised once or twice more, I do not consider it tightening," and added, "It is only natural for the market to predict the year-end base rate to be between 2.75% and 3%." Applying this to loan interest rates means that mortgage loan interest rates, which are close to 6%, could exceed 7% by the end of this year. When the base rate was 3% in December 2008, mortgage loan interest rates soared to 6.81%.

[Image source=Yonhap News]

◆ House prices fall from the outskirts of Seoul where young Yeongkkeuljok are concentrated... Double hardship of interest rate hikes and falling house prices = Meanwhile, house prices have started to decline from the outskirts of Seoul, where the purchase ratio of young Yeongkkeuljok is high, deepening their sighs.

According to the apartment price trend for the second week of this month compiled by the Korea Real Estate Board, apartment prices in Seoul have fallen for seven consecutive weeks. They fell by 0.04% compared to the previous week, and the rate of decline is increasing. The -0.04% change in Seoul apartment prices is the first in about 2 years and 2 months. In particular, the decline is more pronounced in the Gangbuk area compared to Gangnam. While the 11 districts in Gangnam fell by 0.02% compared to the previous week, the 14 districts in Gangbuk fell by 0.06%. Notably, Nowon-gu and Dobong-gu showed the largest decline of 0.1% compared to the previous week, and Gangbuk-gu also fell by 0.09%.

The decline in house prices is due to a noticeable decrease in buyers who are rushing to purchase amid concerns that the base interest rate will rise further. As listings accumulate and buyer sentiment shrinks, transaction volume is virtually nonexistent. Experts expect this trend to continue for some time. Ham Young-jin, head of the Zigbang Big Data Lab, said, "In a situation where house prices are likely to remain flat or fall for a while, it is naturally difficult to make a decision to buy a house with excessive loans while bearing high interest burdens," adding, "If the proportion of borrowers paying household loan interest rates below 5-8% exceeds half of the total, both the household economy and the real estate market will inevitably feel considerable pressure."

Experts point out that rapid interest rate hikes and a crash rather than a stable decline in house prices are dangerous signals for the national economy. Lee Eun-hyung, a research fellow at the Construction Policy Research Institute, said, "At that time, it will not be the house prices that are the problem, but the national economy that could be shaken," adding, "There is a high possibility that the government will intervene to ensure a soft landing of the market. That is the government's original role." Park Chun-sung, a research fellow at the Korea Institute of Finance, said in a report earlier this year, "When interest rates rise, borrowers will try to repay some of their debts to reduce interest costs, but this inevitably reduces their consumption capacity at that time," adding, "It is necessary to prepare so that the real sector does not become excessively sluggish."

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