Expectations for Interest Rate Drop in Q2 Disappointed
Market Rates Rise Since May, Deviating from Forecast
June Mortgage Loan Interest Rate at 4.21%
Highest in 10 Years Since June 2013
At the beginning of this year, borrowers who had taken out loans by stretching their finances to the limit, known as "younggeul" (meaning borrowing to the extent of one's soul), expected that interest rates would fall in the second quarter. However, their expectations did not align with reality, as the interest rates on bank bonds?issued by banks to raise loan funds?began to rise from May onward. Depending on the future direction of interest rates, borrowers' worries may deepen again.
According to the Bank of Korea's Economic Statistics System on the 6th, the interest rate on outstanding housing mortgage loans at deposit banks was 4.21% in June. This was the highest in 10 years since June 2013 (4.26%). The outstanding balance-based interest rate refers to the rate applied to existing borrowers. It had fallen to 2.64% in June 2021 but then rose rapidly over two years. Although the upward trend slowed somewhat in the second quarter, there was no sign of a decline.
The interest rate on outstanding unsecured loans decreased slightly but still remains above 6%. As of June, it recorded 6.35%. Since entering the 6% range in December last year, it has stayed at this level. A representative from a commercial bank explained, "At the beginning of this year, bank loan interest rates showed a clear downward trend. This was because the base rate was frozen, and financial authorities criticized banks for profiting excessively from interest, prompting banks to lower rates."
The reason interest rates, which seemed to have peaked, rose again is that the interest rates on bank bonds issued by banks to raise loan funds increased. A Financial Supervisory Service official said, "Since May, the U.S. has signaled a tightening stance again, and the Bank of Korea increased the issuance of Monetary Stabilization Bonds, causing bond prices to fall (bond yields to rise)." They also noted that market interest rates were excessively low before April, which was another reason for the rise in rates since May. "The yields on government bonds and bank bonds had fallen below the base rate but normalized again, causing market interest rates to rise from May," they added.
The 6-month bank bond yield, which serves as the benchmark for bank unsecured loans, fell to a record low of 3.471% in mid-April but rose to 3.84% by the end of June. The 1-year bank bond yield, which is the benchmark for some banks' variable-rate housing mortgage loans, increased from 3.52% to 3.90% during the same period. The 5-year bank bond yield, which serves as the benchmark for fixed-rate loans, also jumped from 3.85% to 4.25% in the same timeframe.
A financial sector official explained, "For existing borrowers, the interest rate adjustment cycle is mostly between 6 months and 1 year, and coincidentally, market interest rates rose again at the time when rates were reset. Because market conditions moved differently from predictions made in the first half of this year, existing borrowers did not feel the benefit of falling interest rates."
While the possibility of further interest rate hikes is low, the financial sector predicts that the timing of interest rate declines may be delayed. Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "As interest rate hikes in major countries enter their final phase, upward pressure on domestic and international market interest rates is expected to diminish, but strong U.S. employment and economic indicators may delay the shift to a declining interest rate trend."
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