Interest Rates Expected to Reach 8% Following Central Bank Hike

The Bank of Korea's recent increase in the key interest rate is causing fluctuations in loan rates across the banking sector. Major banks are raising their loan rates in anticipation of further increases while also reducing preferential rates. With the latest hike, both variable and fixed mortgage rates are projected to approach 8%.

On July 16, the Bank of Korea raised the key interest rate from 2.50% to 2.75%, an increase of 0.25 percentage points.

As a result, further rate hikes by banks are expected. Typically, when the key interest rate rises, commercial banks increase their deposit and savings rates, leading to higher borrowing costs.

Prior to the rate hike, banks had already begun to adjust for the risks associated with an increase. The June new handling CoFIX (Cost of Funds Index) rose to 3.05%, up 0.15 percentage points from the previous month. This marks the first time in 1 year and 5 months that the CoFIX has exceeded 3%. It has increased for two consecutive months, following rates of 2.89% in April and 2.90% in May.

Consequently, interest rates for specific products, such as mortgages, are also rising. The variable mortgage rates at the five largest banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) have increased by 0.14 percentage points at the upper end and 0.09 percentage points at the lower end, now ranging from 4.12% to 6.37% compared to a month ago.

The upper limit for fixed-rate mortgages has surpassed 7%. As of July 13, the fixed and mixed-rate mortgage rates at these banks ranged from 4.68% to 7.39%, an increase of 0.75 percentage points at the lower end and 1.16 percentage points at the upper end compared to the end of last year, when rates were between 3.93% and 6.23%.

Looking ahead, the pace of rate increases is expected to accelerate further with the recent hike. KB Kookmin Bank and Woori Bank have already decided to raise the rates on their variable mortgage products by 0.15 percentage points starting today. Other banks are likely to follow suit.

However, there are concerns that this rate hike may not be the last. The consumer price inflation rate reached 3.1% in May, the highest since March 2024, and the won-dollar exchange rate continues to rise. Some analysts predict that further increases in the key interest rate could occur in October and January of next year.

In addition to rising rates, there is a trend toward tightening loan limits, making it more difficult to secure loans. KB Kookmin Bank has set a nationwide mortgage limit of 300 million won, while Hana Bank has completely suspended the acceptance of applications for mortgage and jeonse loans for September. Woori Bank has limited its monthly mortgage handling limit from 3 billion won to 1 billion won per branch. All five major banks have temporarily halted new registrations for mortgage insurance.

To further tighten lending, preferential rates are also being reduced. NH Nonghyup Bank raised its variable and fixed mortgage rates by 0.2 percentage points last month. Woori Bank ended its maximum preferential rate of 1.1 percentage points for its five-year fixed-rate 'Woori Apartment Loan' product as of July 1.

Financial authorities are closely monitoring the impact of these rate increases. Lee Chan-jin, head of the Financial Supervisory Service, convened a 'financial situation review meeting' today, urging a thorough assessment of the risk factors associated with the rate hike. He particularly emphasized the need to pay attention to the debt repayment burdens on vulnerable groups and the impact on the supply of productive and inclusive finance by banks.