Borrowers who took out loans at low interest rates during the COVID-19 pandemic are now facing the burden of high rates after five years. The fixed-rate period for mortgage loans has ended, prompting a reassessment of loan interest rates. Concerns are growing that the repayment burden could increase further with the possibility of additional rate hikes by the Bank of Korea.
As of November 6, the mixed-rate (five-year fixed) mortgage rates at the five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—are reported to range from 4.46% to 6.44%. Variable rates (six-month) have also reached between 4.43% and 6.38%. The rates for credit loans are also on the rise, with the five major banks reporting rates between 5.32% and 6.82% as of November 3, nearing 7% at the upper end.
The sustained high loan rates are influenced by the potential for further rate hikes by the Bank of Korea and upward pressure on market rates. With funding costs for banks, such as bond issuance, increasing, and the banks' cautious approach to household lending continuing, expectations for a decline in loan rates in the near future are dim.
Borrowers who secured five-year fixed-rate mortgages during the low-rate period in 2021 are particularly vulnerable. As these loans reach the end of their fixed-rate terms, borrowers are facing a significant shift in the interest rate environment. Typically, mixed-rate mortgages apply a fixed rate for the first five years before transitioning to a variable rate.
According to the Bank of Korea's economic statistics system, fixed-rate mortgage rates fell to the 2% range in April 2019 and remained there until August 2021. Borrowers who took out loans at these low rates are now confronted with a drastically changed rate landscape after five years.
For example, if a borrower took out a 300 million won loan at a 3% interest rate for 30 years with equal principal and interest payments, their monthly payment would be approximately 1.265 million won. After five years of repayments, if the remaining principal of about 267 million won is subject to a new rate of 6%, the monthly payment would increase to about 1.718 million won.
If the interest rate rises to 7%, the payment would increase to about 1.885 million won, and at 8%, it would rise to approximately 2.059 million won. This indicates that borrowers could face an additional monthly burden of several hundred thousand won compared to five years ago. The actual reassessed rate will vary based on the formula agreed upon at the time of the loan and any preferential rate conditions.
Variable-rate borrowers are also facing uncertainty. According to the Korea Federation of Banks, the COFIX (Cost of Funds Index) for new loans rose to 3.43% in September, an increase of 0.25 percentage points from the previous month. This marks the largest increase in nearly three years and will be gradually reflected in the rates for variable-rate mortgages.
New borrowers are also feeling the strain. With mortgage rates climbing to the mid-6% range and additional lending regulations in place, securing funds has become increasingly challenging.
Moreover, the financial health of household loans is deteriorating. According to the Financial Supervisory Service, the delinquency rate for household loans at domestic banks rose to 0.45% at the end of August, an increase of 0.03 percentage points from the previous month. The delinquency rate for mortgage loans also rose to 0.31%, up 0.02 percentage points during the same period.
A financial industry official stated, "If loan rates remain high, households will inevitably have less disposable income for consumption. With the timing of rate adjustments coinciding, there is a growing risk of delinquencies, particularly among borrowers with insufficient income capacity."
* This article has been translated by AI.
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