Applied for a Mortgage, Then Hit Hard... Chain Reaction from Middle East-Driven Interest Rate Shock

As the aftermath of the US-Iran war has impacted the domestic financial market, not only have the exchange rate and stock market experienced turbulence, but interest rates have also shown extreme volatility. The yield on government bonds has swung sharply, resembling a rollercoaster, and this has led to a chain reaction, affecting not only the yields on financial bonds but also household lending rates such as mortgage rates. Experts in the market have advised that since interest rate trends could change depending on whether the situation is prolonged, close attention should be paid to future developments.

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According to the financial sector on March 11, the mortgage loan interest rates at the five major banks (KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, and NH Nonghyup Bank) for five-year hybrid products (fixed for five years, then converted to variable rate) were between 4.16% and 6.76% per annum as of the previous day. Compared to March 2, at the early stage of the US-Iran situation (4.18% to 6.52% per annum), the upper end of the rates has risen by 0.24 percentage points.

This is due to the rapid increase in government bond yields after international oil prices surged above $100 per barrel during intraday trading, which in turn caused a sharp rise in the yield on five-year financial bonds, the benchmark for mortgage loan rates. On March 9, the three-year government bond yield climbed to 3.42% per annum, and the five-year to 3.652%. On the same day, the yield on five-year financial bonds jumped to 3.928%, rising by 0.17 percentage points compared to the previous trading day, marking the highest level in about two years since April 30, 2024 (3.933% per annum).

The rise in five-year financial bond yields directly impacts borrowers. Since the mortgage loan rate is fixed at the time the loan is executed, those who applied for mortgages a month or two ago and received their loans on this day have, quite literally, been hit by a bolt from the blue.

Banks advise that, in this environment of high interest rate volatility, anyone planning financing should carefully examine each bank’s rate calculation criteria. Each bank reflects the benchmark rate at different times. KB Kookmin Bank changes its rates on a weekly basis. It sets its base rate by reflecting the closing yield of the five-year financial bond on the business day prior to the final business day of the preceding week, and maintains this rate for one week. In highly volatile markets, some anticipated increases are reflected in advance, but the bank is relatively less sensitive to rate fluctuations.

In contrast, Shinhan Bank and Woori Bank announce their rates daily, using a simple average over the past three business days. Hana Bank reflects the closing yield from the previous day. This structure allows for immediate reflection of market rate declines, but in periods of high volatility, mortgage rates can also fluctuate sharply. In fact, based on the five-year hybrid mortgage loan rate, Shinhan Bank’s rate rose by 0.07 percentage points in a single day, while Hana Bank’s rate increased by 0.168 percentage points. As of the previous day, the five-year financial bond yield had partially retreated to 3.803%, and this is likely to be reflected in the mortgage rates on this day.

There are also arguments that borrowers should carefully monitor whether the US-Iran situation drags on when deciding between variable and fixed rate products. The greater the volatility, the more advantageous fixed rates become; however, the five-year financial bond, which serves as the benchmark for fixed products, tends to move more closely in sync with government bond yields than short-term bonds do. In reality, when the five-year financial bond yield surged by 0.17 percentage points, approaching 4% per annum, the six-month financial bond yield rose only to 2.857%, an increase of just 0.027 percentage points. If the situation persists, the rate gap could widen even further.

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