South Korean Mortgage Rates Surpass 5% Amid Inflation Fears

Fixed mortgage rates at major South Korean commercial banks are rapidly climbing past 5%, reaching levels not seen since late 2022 when the Bank of Korea implemented aggressive interest rate hikes. This surge is attributed to heightened inflation concerns, exacerbated by geopolitical tensions such as the conflict between the U.S., Israel, and Iran, which are driving up market interest rates.

KB Kookmin Bank, for instance, increased its mortgage rates for fixed and hybrid products by 0.10 percentage points this week. The lowest rate for hybrid fixed-rate mortgages, based on 5-year government bonds, now stands at 5.07%. This is the first time the lower bound has exceeded 5% in approximately three years and seven months, since late October 2022.

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Bond yields are rising day by day. We feel the increased volatility every time we calculate loan interest rates.

Interestingly, the market interest rates are now comparable to those in October 2022, even though the benchmark interest rate was higher then (3.00%) compared to the current rate (2.50%). This suggests that the market is quickly incorporating expectations of future interest rate hikes driven by inflation.

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Despite the significant financial burden of personal loans, demand from individual investors appears to be increasing as the expected returns from stock investments exceed loan interest rates.

The upward trend is not limited to mortgages. The upper limit for mortgage rates has already surpassed 7%, and the lower limits are steadily rising. As of May 22, the hybrid fixed-rate mortgage rates across the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 4.53% to 7.13%. This represents an increase of 0.12 percentage points at both ends compared to late March, primarily due to a rise in the 5-year financial bond rate.

Similarly, personal loan rates have also climbed, with the lower end of rates for prime borrowers (1st grade, 1-year term) now exceeding 4%, up by 0.25 percentage points over the past two months. Even variable mortgage rates, based on the new COFIX benchmark, have seen slight increases. The situation is further highlighted by a significant rise in the outstanding balance of overdraft accounts across the five major banks, which reached 41.28 trillion won as of May 21, an increase of about 1.5 trillion won from the end of last month. Bank officials suggest this surge in borrowing may be driven by individuals seeking to capitalize on the strong stock market, even with the increased cost of borrowing.

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Given the high likelihood of continued interest rate hikes, excessive borrowing for home purchases or investments is risky.