Interest Rates Dropping to 2% Range and Delayed DSR Regulations... Will Mortgage Loans Keep Increasing?

The outstanding balance of mortgage loans at major banks is surging. This is due to the recovery of housing prices mainly in some areas of Seoul and the metropolitan area, as well as the decline in market interest rates, which has lowered the minimum interest rates for bank mortgage loan products to the 2% range annually. The financial sector also believes that the recent lenient stance of authorities, such as postponing the implementation of the second phase of the stress Debt Service Ratio (DSR) regulation that reduces loan limits, may have an impact.

[Image source=Yonhap News]

According to the financial sector on the 26th, the outstanding balance of mortgage loans at the five major domestic commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) as of the 24th was 550.66 trillion won, an increase of 4.354 trillion won (7.9%) compared to the end of the previous month (546.306 trillion won).

This year, the outstanding balance of mortgage loans has shown a clear upward trend. The monthly increase in mortgage loans compared to the previous month was 4.4329 trillion won in January, 2.7713 trillion won in February, -449.4 billion won in March, 4 trillion won in April, and 5.3157 trillion won in May, showing a trend of expanding again.

The reason for the rapid increase in mortgage loan balances is attributed to the recent rise in housing prices in some areas of Seoul and the metropolitan area. According to the weekly apartment price trend by the Korea Real Estate Board, apartment prices in Seoul have been rising for 13 consecutive weeks since late March. The metropolitan area has also been on an upward trend for five consecutive weeks since late May.

Regardless of immediate fluctuations in housing prices, the outlook for the real estate market is also improving. According to the Bank of Korea, the Housing Price Outlook CSI index (forecast for one year ahead compared to the present) rose by 7 points from the previous month to 108 this month, marking the highest level of the year. The Housing Price Outlook CSI index indicates the forecast for one year ahead compared to the present, and it has been on an upward trend since recording 92 at the beginning of the year. This means that positive views on housing price prospects one year from now have increased accordingly.

The loan interest rates reaching the 2% range are also considered to have had an effect. As of the 24th, the mixed (fixed) mortgage loan interest rates at the five major commercial banks ranged from 2.93% to 5.56%, and variable mortgage loan interest rates ranged from 3.74% to 6.42%. The lower end of the mixed product rates even entered the 2% range. This level is close to the period before the Bank of Korea and other central banks around the world began to raise benchmark interest rates in earnest.

This trend is expected to continue for the time being. The introduction of the second phase of the stress DSR regulation, which reduces loan limits, has been postponed until September. The stress DSR phase 2 measure applies not only to existing bank mortgage loans but also to bank credit loans and second-tier financial sector mortgage loans, reflecting a stress interest rate of 0.75%. When applied, loan limits are expected to decrease by about 3-9% for mortgage loans and about 1-2% for credit loans exceeding 100 million won in outstanding balance.

However, the financial sector expects that even if the stress DSR phase 2 is implemented, it will not have a significant impact on the loan market. A financial sector official said, "Although the stress DSR regulation is currently in effect and the second phase is scheduled for September, the recent decline in interest rates has already exceeded the stress DSR ratio, so it is expected to have little impact on loan increases or decreases," adding, "The annual household debt growth target set at the beginning of the year also seems somewhat relaxed."