Mortgage and Credit Loan Repayment Amounts Expected to Increase by About 40%
Concerns Over Contraction of Consumption, the Backbone of the Economy
[Asia Economy Reporter Sim Nayoung] Financial consumers with variable-rate loans are feeling an increasing interest burden day by day. The banking industry expects that if the base interest rate rises to around 3.00% by the end of the year as the market forecasts, some borrowers who took out loans worth hundreds of millions of won under the ultra-low interest rate environment two years ago could see their monthly repayments nearly double.
The variable interest rates for mortgage loans (new COFIX-linked) at the four major banks (KB Kookmin, Shinhan, Hana, and Woori Bank) currently (as of the 5th) range from 3.920% to 5.969% per annum, while the mixed (fixed) rates are between 3.880% and 5.792% per annum. For credit loans (grade 1, 1 year), the rates range from 4.359% to 6.220%, and for jeonse deposit loans (guaranteed by Korea Housing Finance Corporation, 2-year maturity), the interest rates are between 3.870% and 5.769% per annum.
A man in his 30s living in Dobong-gu, Seoul, covered the shortfall when buying an apartment in the second half of last year by taking out a mortgage loan of 390 million won and a credit loan of 45 million won from a commercial bank. Currently, the mortgage loan interest rate is 3.50%, with principal and interest payments already reaching 1.68 million won, and notably, the credit loan interest rate has nearly doubled from 3.50% to 6.05% in less than a year, causing monthly interest payments to jump from 130,000 won to 220,000 won.
Recently, as the sharp rise in bond yields such as bank bonds has eased and banks have lowered interest rates to support vulnerable borrowers during the rate hike period, loan interest rates have generally decreased somewhat compared to about two weeks ago. However, if the Bank of Korea raises the base interest rate further by the end of this year, loan interest rates will inevitably rise.
If the interest burden increases significantly along with the base rate hike, even private consumption, which has recently been a 'pillar' of the domestic economy, is expected to shrink. If interest rates continue to rise rapidly, the growth trend of private consumption, which increased significantly thanks to eased COVID-19 restrictions, could be broken. According to a recent analysis by the Bank of Korea's trend analysis team, a 0.25 percentage point increase in the base rate could reduce private consumption by up to 0.15%.
According to the Bank of Korea, real gross domestic product (GDP) in the second quarter (April to June) increased by 0.7% compared to the first quarter. This growth rate significantly exceeded the market forecast of 0.3 to 0.4%, with private consumption rising 3.0%, mainly driven by semi-durable goods such as clothing and footwear, and services such as food and accommodation and entertainment culture, supporting the economic recovery.
The Bank of Korea explained, "While some demand slowdown due to rising interest rates is inevitable, it is important to consider that the benefits, such as price stability, outweigh these costs."
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