As banks face increased refinancing burdens with the maturity of bonds issued during low-interest periods, high interest rates are beginning to affect households. The rapid rise in domestic and international bond yields is putting upward pressure on mortgage rates as well as loans from secondary financial institutions, such as credit cards. As the increase in funding costs for financial companies is reflected over time, the interest burden on low-income and vulnerable borrowers is expected to grow.
According to the financial sector on September 21, the interest rates for five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—are currently reported to be between 4.90% and 7.388% for five-year fixed and mixed-rate mortgages. With the U.S. Federal Reserve keeping the door open for further interest rate hikes this year, there are predictions that the highest mortgage rates could enter the 8% range if the upward trend in domestic market interest rates continues.
Fixed-rate mortgage rates are primarily based on the yields of five-year bank bonds. Even if the benchmark interest rate does not change immediately, an increase in market interest rates, including bank bonds, will exert upward pressure on mortgage rates. This is especially true in a scenario where long-term rates rise faster than short-term rates, as seen recently, which could lead to a larger increase in fixed-rate mortgage rates.
The rise in interest rates directly impacts borrowers' monthly repayment burdens. For a borrower taking out a loan of 500 million won over 30 years at an interest rate of 5%, the monthly repayment amount would be approximately 2.68 million won. If the interest rate rises to 6%, the monthly repayment would increase to about 3 million won, an increase of around 320,000 won. Annually, this translates to an additional burden of approximately 3.8 million won.
Even if existing loan rates do not rise immediately, new loans or extensions and refinancing processes may apply higher rates. As low-interest funds are replaced with high-interest funds, banks' funding costs will inevitably increase, leading to upward pressure on new loan rates.
Credit card companies, which rely more heavily on market-based funding than banks, face even greater burdens. The average funding cost for eight major credit card companies—Shinhan, Samsung, Hyundai, KB Kookmin, Lotte, Woori, Hana, and BC Card—was 4.42% in August, up 1.61 percentage points from 2.81% a year ago.
While the average interest rate for credit card loans has remained similar to last year, there are signs of increases among high-credit borrowers. The average interest rate for credit card loans for borrowers with credit scores above 900 is 11.84%, up 0.92 percentage points from a year ago. Although the increase in funding costs has not yet been fully reflected in overall credit card loan rates, analysts warn that continued high funding costs could lead to further upward pressure.
The interest rates on corporate bonds, a key funding source for credit card companies, also remain high. As of September 18, the yield on three-year AA+ rated financial bonds was 4.586%, an increase of 1.857 percentage points from a year ago. When credit card companies issue new bonds at higher rates, the overall funding costs will gradually rise each time existing low-interest bonds mature.
The credit card industry anticipates that the recent rise in funding costs will be reflected in credit card loan rates over time. Typically, changes in credit card companies' funding rates are reflected in loan rates with a lag of about three months, suggesting that if high bond yields persist, there could be increased upward pressure on credit card loan rates by the end of the year.
A financial sector official stated, “As market interest rates rise, the funding burden on financial companies is increasing. If the increase in funding costs is reflected in loan rates over time, the interest burden will grow not only for mortgage borrowers but also for low- to mid-credit borrowers using credit card loans.”
* This article has been translated by AI.
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