Mortgage Loan Interest Rates of 7% per Year Are Just a Matter of Time

Joo Sang-young, Acting Chairman of the Monetary Policy Committee, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 14th. 2022.04.14. Photo by Joint Press Corps

Bank Mixed Interest Rates 3.9~6.45%

Speed of Increase Accelerates

Real Estate Market Maintains Wait-and-See Stance

Stock Market Starts Up but Turns Down

[Asia Economy Reporters Sim Nayoung, Kim Minyoung, Hwang Junho] As the Bank of Korea raises the base interest rate, bank loan interest rates are expected to rise in succession. It is only a matter of time before mortgage loan interest rates exceed 7% per annum. The real estate market is expected to maintain a wait-and-see stance for the time being.

On the 14th, the mixed mortgage loan interest rates (switching to variable rate after 5 years) of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 3.90% to 6.45%. The speed of increase is accelerating. It took five months for the mixed interest rate to rise from entering 5% in October last year to reaching the 6% range, but after surpassing 6% for the first time in 11 years at the end of last month, it surged to the mid-6% range within just half a month.

The sharp rise in interest rates is due to fluctuations in bond yields caused by the base rate hike. Banks raise funds for loans through issuing bank bonds and accepting deposits. For example, mixed-rate loans are provided to consumers using funds raised by issuing 5-year bank bonds. The benchmark rate for mixed interest rates, the 5-year bank bond yield, was 3.444% as of the previous day, having surpassed 3% for the first time in 8 years at the end of March, and then rose to the mid-3% range within half a month.

On the same day, the variable mortgage loan interest rates of the five major banks were recorded at 3.18% to 5.30%. This is 0.85 to 1.36 percentage points higher than at the end of April last year (2.33% to 3.94%). Variable rates use the COFIX, which follows the base rate, as the benchmark. The COFIX based on new contracts last month was 1.70%, up 0.06 percentage points from the previous month.

A bank official said, "Mortgage loan interest rates could soon reach 7%," adding, "Although mixed rates are still slightly higher than fixed rates, the vulnerability of variable rates during a rising interest rate period means that the burden on those who borrowed with variable rates to buy homes will increase over time." The credit loan interest rates of the five major banks also rose significantly to 3.34% to 5.18%, compared to 2.02% to 4.52% a year ago.

As bank loan interest rates rise, the real estate market is expected to continue its wait-and-see stance for the time being. Rising interest rates act as a factor that dampens the purchasing sentiment of people buying real estate such as homes through loans. The transaction freeze caused by loan regulations remains, so except for some redevelopment-related complexes in the Gangnam area, the current drought in transactions is expected to continue.

Ham Youngjin, Head of the Big Data Lab at Zigbang, said, "The combination of stable or adjusting real estate prices in some areas and rising interest rates is expected to weaken real estate purchasing sentiment," adding, "Both actual buyers and investors are expected to wait for clear policy directions such as regulatory easing from the new government, so the wait-and-see stance will continue for the time being."

Meanwhile, the stock market, which started the day higher, turned downward. As of 10:35 a.m., the KOSPI was down 0.17% from the previous close at 2711.76, and the KOSDAQ was down 0.07% at 926.62. Seo Sangyoung, a researcher at Mirae Asset Securities, said, "The base rate hike is a factor that increases intraday volatility," and added, "There is also the burden that volatility at the closing price may increase due to position liquidation centered on financial investment, citing the possibility of futures overvaluation issues after the options expiration day."