As the Bank of Korea (BOK) formalized plans for future rate hikes, borrowers are on edge. In the banking sector, there is an outlook that the upper end of mortgage loan rates could surge to the 8% range if the base rate is raised. The upper end of mortgage loan rates topped 7% in mid-last month and has been inching up since.
According to the Korea Financial Investment Association's Bond Information Center on the 1st, the five-year unsecured AAA financial debenture yield, which serves as the benchmark for bank fixed-rate mortgage loans, stood at 4.207% as of the 29th of last month. It edged down from the previous day (4.28%) but remains elevated compared with early this year (3.4%–3.5%).
After holding rates steady for eight consecutive meetings, the Bank of Korea (BOK) said a hike is unavoidable. Governor Shin Hyun-song said on the 31st of last month, "Whether you look at prices, growth, the exchange rate, or real estate, the path is clear. It is deemed necessary to raise the base rate at an appropriate time going forward."
As of the 29th of last month, the five-year fixed rates on mortgage loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) were in a range of 4.26% to 7.10% per year. Compared with about half a month earlier, the lower end rose 0.01 percentage point (P) and the upper end rose 0.05 percentage point (P). A banking industry official said, "If the Bank of Korea (BOK) raises the base rate, bank lending rates will inevitably rise as well."
In early January 2023, about three and a half years ago, mortgage loan rates at commercial banks topped 8%. At that time, the lending rate based on new COFIX for Woori Bank's flagship mortgage loan product, Woori Apartment Loan, was 7.32%–8.12% per year. During this period, the five-year unsecured AAA financial debenture yield was around 4.2%–4.3%, similar to now. At Kbank, the fixed-rate mortgage loan is still 4.54%–8.42%.
Borrowers who took on "debt investment" to ride the KOSPI boom also look set to face heavier burdens. The outstanding loan balance of personal credit loans at the five major banks stood at 106.9909 trillion won as of the end of May, up 2.6496 trillion won (2.54%) from the end of April (104.3413 trillion won). This is the largest increase in five years and one month since April 2021 (6.8401 trillion won), when the virtual asset investment frenzy was in full swing.
Overdraft account balances also reached 41.9303 trillion won as of the end of May, an increase of 2.1426 trillion won (5.39%) from the end of April. This too is the largest increase since April 2021.