Fixed-rate mortgages at major banks now cost at least 5% a year — over W2m a month

Global inflation shocks and the Bank of Korea's subsequent benchmark interest rate hikes have driven market rates sharply higher, pushing bank lending rates up with them. Even the most creditworthy borrowers who meet every preferential condition can no longer secure a fixed-rate mortgage below 5 percent annually at major domestic banks. As variable-rate loan increases are expected to accelerate toward year-end, the interest burden on existing borrowers is set to grow further.

As of Wednesday, fixed-rate mortgage rates at the five major banks — KB, Shinhan, Hana, Woori and NH NongHyup Bank — ranged from 4.90 percent to 6.89 percent annually, according to financial industry data. Both the upper and lower ends rose compared with the March 23 range of 4.19 percent to 6.79 percent. The increase reflects a rise in the five-year bank bond rate — the benchmark used to price these loans — from 4.388 percent to 4.513 percent.

The climb in the lower-end rate has been particularly striking. It moved from 4.26 percent on May 29 to 4.61 percent on July 1, then to 4.72 percent on Aug. 27. As of Wednesday, four of the five banks had lower-end rates above 5 percent, and the remaining bank is widely expected to cross that threshold soon.

Loan rates are set by adding a spread — covering the bank's margin and other costs — to the benchmark rate, then subtracting preferential rate discounts. Where a borrower falls within the upper-to-lower range depends on how many of the bank's preferential conditions they satisfy.

Typical preferential conditions include using an affiliated credit card above a set spending threshold, setting up automatic transfers for utility bills or salary, completing various electronic contracts when purchasing real estate, and meeting criteria for vulnerable borrowers. In the current lending environment, borrowers must satisfy all of these conditions just to qualify for a rate in the 5 percent range.

To illustrate: on a 400 million won ($294,000) loan with a 30-year term repaid in equal principal-and-interest installments, a borrower at the March 23 lower-end rate of 4.19 percent would pay 1.95 million won per month. If the rate rises to 5 percent, the monthly payment climbs to 2.15 million won.

"It is rare for an ordinary borrower to meet all the preferential conditions," a commercial bank official said. "As a rule of thumb, the average rate at which loans are actually extended is about 0.5 percentage points above the lower-end rate."

Notably, current rates already reflect voluntary cuts that banks made in the name of inclusive finance. NH NongHyup Bank lowered the upper and lower ends of its spread on in-person mortgage loans by 0.45 percentage point and 0.20 percentage point, respectively, on Sept. 16.

Financial markets expect the upper end of fixed-rate bank lending to comfortably exceed 8 percent annually and the lower end to surpass 6 percent before this rate-hike cycle ends. The market consensus for the peak Bank of Korea benchmark rate stands at around 3.50 percent annually. However, the extent to which inflationary pressure widens — partly depending on the fallout from the Middle East conflict involving Iran — could push rates even higher.

Financial regulators see variable-rate loans, which are more widely used by borrowers, as the main pressure point for future rate increases. Variable-rate loans use the new COFIX — which reflects banks' funding costs including deposit rates and bank bonds — as their benchmark, and banks have been raising deposit rates in step with recent benchmark rate increases.

One-year fixed deposit rates at the five major banks currently stand at around 3.5 percent annually. Because deposits are typically rolled over heavily in the fourth quarter, the new COFIX for November and December is expected to rise sharply. According to the Korea Federation of Banks, the new COFIX for August was 3.18 percent annually, having risen for four consecutive months before being held flat last month.

As of March 23, variable-rate mortgage rates at the five major banks ranged from 3.61 percent to 6.01 percent annually. A borrower who took out 400 million won at 4 percent at that time — on a 30-year term with equal principal-and-interest repayments — would have been paying 1.91 million won per month, based on the new COFIX of 2.82 percent published on March 16.

That loan's benchmark rate reset under the six-month COFIX adjustment cycle, rising from 2.82 percent to 3.18 percent as of Wednesday. As a result, the borrower's monthly payment increased to 1.99 million won. If the Bank of Korea raises its benchmark rate further before next March and the new COFIX climbs to 3.50 percent, the monthly payment would swell to 2.07 million won.

Rising loan rates increase the interest burden on existing borrowers, but they also curb demand for new loans, which helps slow the growth of household debt.

To ease the strain on individual borrowers from rising rates, financial regulators are preparing to introduce long-term fixed-rate mortgages with maturities of 10 years or more. While banks currently use the five-year bank bond rate as the primary benchmark for fixed-rate mortgages, a shift to the 10-year bank bond rate is under serious consideration.