Interest Rates Rise as Borrowing Becomes More Difficult

The Bank of Korea's interest rate hike is increasing the financial burden on borrowers. With financial authorities managing household loan limits, banks are raising their lending thresholds, compounding the difficulties for borrowers who are already facing higher interest rates.

As of July 16, the fixed-rate mortgage interest rates at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) range from 4.77% to 7.49%, with the upper limit surpassing 7%. Compared to the end of May (4.26% to 7.10%), the lower limit has increased by 0.51 percentage points, and the upper limit by 0.39 percentage points. This reflects market expectations of further interest rate hikes.

Variable-rate loans, which previously offered lower rates, are also on the rise. The variable rates at the five major banks are now between 4.13% and 6.58%, up by 0.06 to 0.21 percentage points from the end of last month. This increase is due to the rising COFIX (Cost of Funds Index), which has exceeded 3% for the first time in 19 months, reaching 3.05% last month.

The situation is concerning as loan limits are rapidly decreasing while interest rates continue to rise. As of July 15, the outstanding household loans at the five major banks, excluding policy loans, totaled 649.66 trillion won, an increase of 4.69 trillion won from the end of last year (644.97 trillion won). This figure exceeds the annual increase target of 4.34 trillion won set by the Financial Supervisory Service by approximately 3.5 trillion won. Major banks are tightening lending standards by reducing mortgage limits and restricting access to mortgage credit insurance (MCI) and mortgage credit guarantees (MCG).

With the added burden of rising interest rates, borrowers are expected to face even greater financial challenges. The Bank of Korea has left open the possibility of further rate hikes this year, and banks are finding it difficult to lower rates due to household loan management. If additional rate increases occur, banks' funding costs will rise, leading to upward pressure on loan rates.

According to data submitted by the Bank of Korea to lawmaker Lee Jong-wook, a 0.25 percentage point increase in mortgage rates would raise the annual interest burden on borrowers by approximately 1.8 trillion won, with each borrower facing an average increase of 296,000 won. If rates rise by 0.75 percentage points, the average annual interest burden per borrower could increase to 889,000 won.

Borrowers with variable-rate loans may see their repayment capacity deteriorate more quickly due to rising rates. Variable-rate mortgages are adjusted periodically based on benchmark rates like COFIX, which means the impact of rate increases is felt more rapidly by households. As of the end of May, the proportion of new variable-rate mortgage loans was 58.4%, the highest level since June 2021 when it was 60.5%.

A financial industry official stated, "New borrowers must consider both loan limits and interest burdens. If rising rates increase repayment pressures, there is a risk of higher delinquency rates, particularly among vulnerable groups, leading to potential household loan defaults. Close monitoring is necessary."