The Endless 'Yeongkkeuljok Pain', Rising Interest Rates Continue [Why&Next]

Borrowers Who Took Out Loans with Variable Rates During Low-Interest Period
Burden Increases as COFIX Rises by 3 Percentage Points Over 2 Years

Existing Loan Interest Rates Concentrated Around 5% Annually
New Loan Rates Decline, Existing Loan Rates Rise

On the 14th, in a real estate-dense shopping district in Songpa-gu, Seoul, where the decline in real estate prices and the transaction freeze phenomenon continue, apartment listings with market prices are posted. Photo by Kang Jin-hyung aymsdream@

The pain of the 'Yeongkkeul (meaning borrowing to the limit, even to the soul) group,' which seemed to be coming to an end, is lasting longer than expected. Earlier this year, market predictions were dominated by the belief that the interest rate hike tunnel would be over in the second half of the year. However, the timing for interest rate cuts has been indefinitely postponed. The Bank of Korea began raising the base interest rate in August 2021. After 2 years and 2 months, the base rate has risen from 0.5% to 3.5%. The Bank of Korea also decided to keep it unchanged on the 19th of this month.

The existing Yeongkkeul group is bearing a heavier burden than the new Yeongkkeul borrowers. From 2019 to early 2021, when the base interest rate was down to the 0% range, the phrase "If you don't buy now, you'll never be able to" spread like a trend, leading to a panic buying spree. The existing Yeongkkeul borrowers who joined at that time are in a blind spot not covered by the banks' interest rate cut measures. From June last year to April this year, financial authorities pressured commercial banks to roll out a series of measures to reduce mortgage loan interest rates. These measures applied only to new loans.

The pain is greater for existing Yeongkkeul borrowers

Looking at the 'proportion of mortgage loan interest rates by range' published monthly by the Korea Federation of Banks, divided into 'outstanding balance' for existing borrowers and 'newly issued amount' for new borrowers, the 'proportion of loans with interest rates above 5%' (as of last August) was much higher in the outstanding balance. Among the five major banks, NH Nonghyup Bank had the highest at 42.4%, followed by KB Kookmin Bank at 38.2%. This means that about 4 out of 10 existing mortgage borrowers have interest rates above 5%. Hana Bank (35.9%), Woori Bank (34.4%), and Shinhan Bank (22.2%) followed.

Looking at the newly issued amounts, loans with interest rates above 5% were almost nonexistent. Only Shinhan Bank showed a slight presence at 5.7%, while other banks had none. Instead, the focus was on the 4% range. The proportion of loans with interest rates between 4% and less than 5% was highest at KB Kookmin Bank and Hana Bank (each 99.4%), followed by Woori Bank (98.9%), NH Nonghyup Bank (95%), and Shinhan Bank (94%).

The Bank of Korea raised the base interest rate by 0.5 percentage points, and the real estate transaction market is expected to experience a prolonged winter. On the 13th, a red light was on at a traffic signal near an apartment in downtown Seoul.

A commercial bank official explained, "Authorities have suppressed sharp rises in new loan interest rates, but existing loan interest rates were not touched due to the significant impact on the banking industry." Because of this, Yeongkkeul borrowers with variable-rate mortgage loans fully absorbed the shock of the COFIX (Cost of Funds Index) increase. COFIX, which was 0.82% in June 2021, rose to 3.82% in October this year, a difference of exactly 3 percentage points. Borrowers who took out loans at around 2% then now face rates in the 5% range.

The financial sector explains that "the interest rate surge triggered by the Legoland incident in September last year was like a nuclear bomb." At that time, bond market interest rates soared, pushing up bank bond rates and consequently loan interest rates. To calm the situation, financial authorities restricted banks' issuance of financial bonds, but a balloon effect occurred. Commercial banks' deposit and savings interest rates rose to 5%, sparking a battle for deposit rates, which in turn became another factor for loan interest rate hikes. Subsequently, financial authorities demanded banks to lower rates, but this applied only to new loans, leaving existing Yeongkkeul borrowers out of the picture.

'Refinancing' is the only option, but

Bank of Korea statistics show a clear contrast between existing and new loans. The variable interest rate on mortgage loan outstanding balances was 4.7% in August this year, having risen continuously for over two years since July 2021. In contrast, the new loan base rate peaked at 5.31% in November last year and dropped to 4.50% in August this year.

A commercial bank official said, "Considering the ongoing decline in household loans since last year, it can be seen that many Yeongkkeul borrowers have not benefited from the financial authorities' interest rate cut measures." From 2020 to 2021, when interest rates were low and housing prices high, mortgage loans at domestic deposit banks increased by KRW 95.5955 trillion. In contrast, from 2022 to the present (August 2023), the increase was only KRW 25.798 trillion.

The only interest rate reduction card available to existing Yeongkkeul borrowers is refinancing by switching to another bank. KakaoBank and K Bank have absorbed a large demand for refinancing loans by offering lower interest rates in the 3% range compared to commercial banks. The Financial Services Commission plans to launch a mortgage refinancing platform as early as the end of December to encourage interest rate reductions. However, borrowers with a DSR (Debt Service Ratio) exceeding 40% are excluded and cannot use refinancing loans.

It is uncertain how long the interest rate burden on Yeongkkeul borrowers will continue. Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, analyzed, "Concerns about prolonged high interest rates have highlighted a rapid rise in rates. The tightening level is reinforced by the rise in U.S. long-term bond yields, and if Middle East conflict risks spread, it could worsen oil supply conditions and raise oil prices, increasing uncertainty."

Interest rates at commercial banks are clearly on the rise. As of the 23rd, the variable mortgage loan interest rates at the five major banks ranged from 4.55% to 7.14%, and fixed rates ranged from 4.36% to 6.69%. These are increases compared to the 4th of this month (variable rates 4.17% to 7.12%, fixed rates 4.05% to 6.41%).

Real estate stock photo / Photo by Mun Ho-nam munonam@

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