'Ultra-Low Rate Yeongkkeul Aftermath'... Mortgage Delinquency Rate Remains High Despite Rate Cuts

Max-Leverage Borrowers Face High-Rate Boomerang on Ultra-Low Interest Loans from Five Years Ago
Delinquency Rate Rises as Interest Burden Grows... Up from 0.15% to 0.35% in Five Years
Mortgage Rates Remain High Despite Interest Rate Cuts
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The mortgage delinquency rate in Seoul has remained in the 0.3% range for 20 consecutive months, showing resilience despite the recent trend of falling interest rates. The delinquency rate has risen further this year, reaching an average of 0.35%. This increase is attributed to a growing number of borrowers who are struggling to repay interest as their mortgage rates are being reset after taking out loans during the ultra-low interest rate period five years ago. Despite two benchmark interest rate cuts this year, the burden of interest payments has grown because mortgage rates remain high due to the ongoing management of the total volume of household loans.

According to the Bank of Korea's Economic Statistics System on November 6, the average mortgage delinquency rate for banks in Seoul from January to August this year was 0.35%. This is the highest annual figure since related statistics began to be compiled in December 2019. The annual average delinquency rate remained in the 0.1% range from 2020 to 2022, but rose to 0.26% in 2023 and further expanded to 0.31% last year.

On a monthly basis, the rate has stayed in the 0.3% range for 20 months since January 2024 (0.32%). The delinquency rate has worsened further this year, reaching a record high of 0.37% in May. For three consecutive months after that, it remained in the 0.35% range, maintaining a high level. As the rate in Seoul rose, the nationwide mortgage delinquency rate also increased. As of August, the nationwide mortgage delinquency rate stood at 0.3%, up from 0.29% the previous month.

The delinquency rate refers to the proportion of mortgages for which principal and interest have not been repaid for more than one month. This means that out of every 1,000 mortgage borrowers in Seoul, three to four have fallen behind on their payments by more than a month.

This rise in delinquency rates is seen as a boomerang effect from the ultra-low mortgage rates of 2020. Many so-called "Yeongkkeul" (a term for those who stretched their finances to the limit) borrowers, who took out loans at low rates of around 2% in 2020, are now struggling to cope with sharply increased interest payments as their rates are being reset this year. The average mortgage rate this year is 4.03% per annum, up 1.53 percentage points from 2.5% in 2020. For example, a 500 million won mortgage taken out in 2020 at a 2.5% rate (30-year amortized repayment) would have required a monthly interest payment of about 1.97 million won at that time, but this year, the payment has increased to 2.37 million won (based on a 4.0% annual rate).

Despite the rate-cutting trend, banks have kept mortgage rates high to manage the total volume of household loans, which has also contributed to the increase. Although the benchmark rate was cut by a total of 1 percentage point over four occasions from October last year (when the policy pivot began) to May this year, mortgage rates only dropped by 0.09 percentage points.

The delinquency rate may rise further in the future. First, mortgage rates are expected to increase further. This is because the benchmark bank bond rate is rising, and regulations such as higher risk weights for mortgages as part of household loan management are being further tightened. In addition, since the period when the average mortgage rate was below 3% lasted until August 2021, the aftereffects of "ultra-low mortgage rates" are expected to persist at least until August next year. The number of "Yeongkkeul" borrowers who feel burdened by higher interest payments may continue to grow as rates rise. As of December 2020, 81.2% of household loans had interest rates below 3%.

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