Mortgage rates could hit 8% as bond market turbulence pushes borrowing costs higher

A salaried worker in his 40s recently visited a bank to buy a home he had long had his eye on, encouraged by a government policy expanding loan limits. Planning to borrow 450 million won ($323,000) over 30 years, he was quoted an annual rate of 7.1% — putting his monthly principal-and-interest payment at around 3.02 million won. Already taken aback by the higher-than-expected rate, he now faces a harder choice: with long-term government bond yields in the United States and Japan surging recently and bank lending rates poised to follow, he is weighing whether to lock in a rate in the 7% range while he still can.

The spike in US and Japanese government bond yields is expected to push domestic bank lending rates back onto an upward trajectory. Markets are watching for the possibility that if the Bank of Korea raises its benchmark interest rate again, fixed-rate mortgage rates could reach 8% before year's end. The government's Aug. 13 real estate package added roughly 30 trillion won in new household loan capacity, reopening the door for borrowers — but with rates climbing rather than falling, the interest burden on those borrowers is set to grow heavier.

According to the Korea Financial Investment Association's bond information center, the yield on five-year bank bonds — the benchmark for fixed-rate bank lending — averaged 4.398 percent per annum as of Thursday. The five-year yield had climbed from 3.865 percent on April 17 to 4.473 percent on June 8, driven by the prolonged US-Iran conflict and related inflation concerns, before easing to 4.243 percent by Aug. 5. It has since rebounded.

The recent rate rise is widely attributed to a surge in US Treasury yields. The US government's debt has surpassed $40 trillion for the first time, stoking concerns that a wave of refinancing supply could flood the market. Analysts also point to inflation fears stemming from the prolonged Middle East conflict and intensifying competition for funding between the US government and major technology companies as additional factors pushing yields higher.

Markets expect the upward pressure on rates to persist, given that the drivers are structural rather than temporary. Of late, the prospect of Japanese capital repatriation — funds flowing back to Japan — has added further upward pressure. The US government's buyback announcement on Wednesday sent the 30-year Treasury yield plunging from 5.33 percent to 5.19 percent on Thursday, but the rate rebounded to 5.24 percent the following day, largely erasing the effect.

As bank bond yields climb again, domestic lending rates are expected to follow. The ceiling on fixed-rate mortgage rates at the five major banks — KB, Shinhan, Hana, Woori and NH — edged up to 7.17 percent per annum on Friday, from 7.16 percent on Thursday. The ceiling had peaked at 7.50 percent on July 31 before trending downward through Thursday, but the recent rise in bank bond yields has triggered a reversal. Markets now see the ceiling reaching 8 percent this year if the Bank of Korea proceeds with an additional benchmark interest rate increase.

The government's Aug. 13 real estate package has partially reopened the lending window by easing previously capped loan limits, but the still-high rates are deepening the dilemma for prospective borrowers.

For example, borrowing 450 million won at the current five-major-bank ceiling of 7.1 percent per annum — on a 30-year, fully amortizing loan — would require monthly payments of 3.02 million won. If the rate rises to 8 percent, that monthly payment would increase to 3.3 million won.

Variable-rate loans are also expected to trend higher. The COFIX rate, which serves as the benchmark for variable-rate bank lending, is determined by banks' funding costs, including time deposits and bank bond issuance. According to the Korea Federation of Banks, the new COFIX for July came in at 3.18 percent, rising for four consecutive months since March. Since variable rates are typically adjusted every six months, borrowers who took out variable-rate loans earlier this year can expect their interest payments to increase.

Despite the government's expanded loan quota, banks have decided to maintain their own lending controls for now — including individual borrowing caps and the reduction or elimination of preferential rate discounts. Because a significant portion of the newly allocated quota must go toward group loans and support for vulnerable borrowers, banks have concluded that loosening restrictions on general lending could undermine overall household debt management. "If we ease loan limit regulations or lower rates, demand could surge quickly," an official at one commercial bank said. "The intent of this policy is to address urgent needs like group loans, so we plan to keep things tight for now."