The mortgage rates at South Korea's five major banks have surged to their highest level since statistics began being recorded. In June, the average mortgage rate for new installment loans from KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup banks reached 3.27%, the highest since July 2019. This marks a significant increase from 2.99% in December of last year, with rates rising for seven consecutive months this year.
Banking officials explain that the increase in mortgage rates is partly due to efforts to manage the total volume of household loans, which has led to a slowdown in the growth of mortgage lending. However, the costs of operations and risk premiums are also factored into these rates, meaning not all of it contributes to bank profits. In fact, the interest rate spread between mortgage loans and deposits at the five major banks decreased from 1.56% in May to 1.48% in June. Nonetheless, it is clear that volume regulation has pushed rates higher. As the government restricted loan volumes, banks raised prices to reduce demand, ultimately passing the costs onto borrowers.
While managing household debt is a valid concern, the current rigid approach of setting total volume targets for financial institutions and imposing penalties for exceeding them is problematic. For banks, raising rates or reducing lending limits has become the easiest response.
The negative effects of this approach are already evident. Access to essential loans, such as those for down payments or relocation expenses, has become more difficult. Consequently, the government announced on August 13 that it would double the target increase rate for household loans this year from 1.5% to 3%, and would separately manage loans related to housing supply, such as relocation and interim loans. This adjustment comes just four months after the initial targets were set.
The fundamental limitation of total volume regulation is its failure to distinguish between borrowers' risks and repayment capabilities. Genuine homebuyers who can manage their principal and interest payments are competing within the same volume limits as speculative buyers seeking to purchase multiple properties with excessive debt. When limits are reached, even creditworthy borrowers may have to pay higher rates or forgo loans altogether. Financial regulation should focus on preventing borrowing that exceeds repayment capacity rather than simply reducing debt levels.
The solution lies in refining regulations centered on repayment ability, such as the Debt Service Ratio (DSR). Stricter measures should be applied to multiple property owners and high-risk loans, while distinguishing between genuine demand from first-time buyers and funds for relocation. Total volume targets for financial institutions should serve as a supplementary tool, not a means to drive up interest rates.
Banks should not use total volume regulation as an excuse to maintain high mortgage rates. With the government increasing lending capacity, there may be room to lower adjustment rates that suppress demand. While managing household debt is necessary, it should not be at the expense of genuine borrowers. The record high mortgage rates signal that it is time to reassess the current total volume regulation approach.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.