"When Will My Interest Rate Drop?"... Why Existing Borrowers' Rates Hit a 10-Year High

June Home Mortgage Loan Balance-Based Interest Rate at 4.21%
Highest in 10 Years Since June 2013

Financial Authorities Expected Interest Rate Drop in Q2 This Year
But Market Rates Rose Since May, Missing Forecast

"New loan interest rates are on a declining trend, and the rise in balance-based interest rates is also significantly slowing down. Considering that it takes some time for the effect of the new loan interest rate decline to be reflected in the balance-based rates, the balance-based interest rate is expected to shift to a downward stabilization trend in the second quarter unless market interest rates turn upward." (Financial Supervisory Service briefing on April 4)

At the beginning of this year, borrowers who had taken out loans by stretching their finances to the limit (referred to as Yeongkkeul, meaning 'pulling together even the soul') expected that "interest rates would fall in the second quarter," but reality was different. This is because the interest rates on bank bonds, which banks issue in the market to raise loan funds, have risen since May. Depending on the future direction of interest rates, borrowers' worries may deepen again.

Why Didn't the Interest Rates, Expected to Fall, Drop?

According to the Bank of Korea Economic Statistics System on the 4th, the balance-based interest rate on housing mortgage loans at deposit banks in June was 4.21%. This was the highest level in 10 years since June 2013 (4.26%). The balance-based interest rate refers to the rate applied to existing borrowers. It had fallen to 2.64% in June 2021 but rose rapidly over two years. Although the upward trend slowed in the second quarter, there is still no sign of a decline.

The balance-based interest rate on unsecured loans has slightly decreased but still exceeds 6%. It recorded 6.35% as of June. Since entering the 6% range in December last year, it has remained at this level. A representative from a commercial bank explained, "At the beginning of this year, bank loan interest rates showed a clear downward trend," adding, "Since the base rate was frozen and financial authorities criticized interest profiteering, banks also lowered their rates."

The reason the interest rates, which seemed to be falling, rose again is that the interest rates on bank bonds issued by banks in the bond market to raise loan funds increased. A Financial Supervisory Service official said, "Since May, the U.S. has signaled a tightening stance again, and the Bank of Korea increased the issuance of Monetary Stabilization Bonds, causing domestic bond prices to fall (bond yields to rise)." They also pointed out that market interest rates were excessively low until April, which is another reason for the rise since May. The official added, "The normalization of government bond and bank bond yields, which had fallen below the base rate, also caused market interest rates to rise from May."

Interest Rate Decline May Arrive Later Than Expected

The 6-month bank bond rate, which serves as the benchmark for bank unsecured loans, fell to a yearly low of 3.471% in mid-April but rose to 3.84% by the end of June. The 1-year bank bond rate, which is the benchmark for variable-rate housing mortgage loans at some commercial banks, increased from 3.52% to 3.90% during the same period. The 5-year bank bond rate, a benchmark for fixed-rate housing mortgage loans, also jumped from 3.85% to 4.25% in the same period.

A financial sector official explained, "For existing borrowers, the interest rate adjustment cycle is mostly between six months and one year, and coincidentally, market interest rates rose again at the time when rates were supposed to change," adding, "Because the market situation moved differently from the predictions made in the first half of this year, existing borrowers have not felt the decline in interest rates."

The financial sector predicts that while the possibility of further interest rate increases is low, the timing of interest rate declines may be delayed. Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "As major countries' rate hikes enter the final phase, the probability of domestic and international market interest rates rising seems low, but due to strong U.S. employment and economic indicators, the transition to a declining interest rate trend may be delayed."

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