Monthly interest on W250m jeonse loan jumps to W1.25m as rates top 6%

A man in his 40s, identified only as A, took out a 250 million won ($173,000) jeonse loan at an annual rate of 5 percent earlier this year to secure a jeonse home in Seoul. He recently received a notice from his bank that his interest rate would change in line with the six-month variable rate.

The bank told him his rate had risen as market interest rates climbed. As a result, his monthly jeonse interest payment will increase from 1 million won to 1.25 million won starting this month — a jump of 250,000 won in fixed monthly expenses that has left him wondering where to cut costs.

Rising market rates have pushed jeonse loan rates at major banks — a key product for genuine housing demand — to nearly 6 percent annually. Borrowers who signed jeonse contracts earlier this year now face a sharp increase in their monthly interest burden. With banks moving one after another to suspend variable-rate mortgage products, fixed-rate mortgage rates are also approaching 8 percent annually, deepening concerns for prospective homebuyers.

The jeonse loan rates at the five major banks — KB, Shinhan, Hana, Woori and NH NongHyup Bank — stood at an annual 3.31 percent to 6.01 percent as of Friday, according to financial industry sources. The figures combine products that use either the six-month bank bond rate or the new-business COFIX as their benchmark rate.

The jeonse loan rate range at the five banks rose from an annual 2.86 percent to 5.66 percent at the end of January to 2.91 percent to 5.71 percent at the end of March. It dipped slightly to 2.71 percent to 5.56 percent on May 29 before climbing again. The upper end of the range as of late last month was 0.35 percentage points higher than at the end of January.

The increase reflects a simultaneous rise in the six-month financial bond rate and the new-business COFIX, both of which serve as benchmark rates. According to the Korea Financial Investment Association's bond information center, the six-month bank bond rate — an average of five credit rating agencies — rose from an annual 2.807 percent on Jan. 30 to 3.259 percent on Friday, a gain of 0.45 percentage points. The new-business COFIX also climbed from 2.77 percent in January to 3.05 percent in June.

Most jeonse loans, excluding policy finance products, are structured as six-month variable-rate products. Rising market rates therefore feed through to borrowers' interest costs with a certain lag.

For example, a borrower who took out a 250 million won jeonse loan at the five major banks' upper rate of 5.66 percent annually on Jan. 30 would have paid 1.18 million won in monthly interest over the past six months. If the rate has now risen to 6.01 percent, that borrower will pay 1.25 million won per month for the next six months.

Mortgage rates are also continuing to rise. The variable-rate mortgage range at the five major banks edged up from an annual 3.61 percent to 6.01 percent on March 30 to 3.63 percent to 6.03 percent on May 29. The upper end then jumped into the 6.3 percent range last month.

Fixed-rate mortgages, which use bank bonds as their benchmark, have risen even more sharply. The upper end of the fixed-rate mortgage range stood at an annual 7 percent on March 30 and climbed to 7.50 percent on Friday.

With the Federal Reserve signaling a possible benchmark interest rate hike this year and the Bank of Korea embarking on full-scale monetary tightening, the upward trend in bank lending rates is likely to persist. Financial industry observers say fixed-rate mortgage rates could reach 8 percent annually before the year is out if market rates continue to rise.

Financial regulators' caps on total household lending are also adding upward pressure on rates. Banks are trimming preferential rates and raising rates on non-face-to-face loan products to meet their household loan growth targets. A growing number of banks have also suspended variable-rate mortgage products, which typically carry lower rates than fixed-rate ones.

As of Thursday, the five major banks' combined household loan balance had grown by 5.34 trillion won from the end of last year, exceeding the regulator's annual target by 1 trillion won. That figure was up 773.8 billion won from a week earlier. The combined remaining loan capacity at banks that have not yet breached their targets amounts to no more than 394.2 billion won.

Financial regulators plan to announce real estate lending measures early this month. At a real estate forum held last month, proposals were raised to restrict jeonse loans for non-resident single homeowners or to impose macroprudential management obligations on financial institutions. Depending on the strength of any additional measures, the lending threshold and financial costs for some borrowers could rise further.