17% of New Loans Carry Interest Rates Above 5%, Raising Concerns

More than 17% of new household loans issued by banks have interest rates exceeding 5%. This figure has more than doubled in the past year due to increases in the Bank of Korea's base rate and rising market interest rates. Nearly 80% of new loans are variable-rate, indicating that households may face increased interest burdens if rates rise further.

According to the Bank of Korea, as of July, the proportion of new household loans with interest rates above 5% was recorded at 17.3%, up from 7.4% in July of last year, marking a 9.9 percentage point increase. This is also 5.2 percentage points higher than the 12.1% recorded in January of this year.

In contrast, the share of loans with interest rates below 4% plummeted from 57.9% in July of last year to 21.1% in July of this year, a decrease of 36.8 percentage points. The focus of new household loan interest rates has shifted rapidly from below 4% to above 4% within a year. The proportion of loans in the 4.0% to 4.5% range also expanded from 30.9% to 39.3%, an increase of 8.4 percentage points.

The rise in loan interest rates is attributed to increasing market rates, including bank bonds. According to the Korea Financial Investment Association, the yield on five-year bank bonds, which serve as a benchmark for fixed-rate mortgage loans, rose to 4.343% at the end of July, up 0.715 percentage points from 3.628% at the end of January. The potential for further increases in the Bank of Korea's base rate has also contributed to higher funding costs for banks.

Borrowers are feeling the impact of rising loan rates. As of now, the mixed-rate mortgage rates at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) range from 4.69% to 7.12%. This is an increase of 0.76 percentage points at the lower end and 0.89 percentage points at the upper end compared to the rates of 3.93% to 6.23% at the end of last year. The upper limit for credit loan rates has also risen to 6.26%.

There remains a possibility of further increases in loan rates. As the U.S. faces an expanding budget deficit and increased Treasury supply, long-term U.S. Treasury yields are rising, which could exert upward pressure on domestic government bond and bank bond rates. If the Bank of Korea raises its base rate again, the costs for banks and household loan rates could increase further.

As of now, the yield on the U.S. 10-year Treasury bond reached 4.764% during trading, the highest level since January of last year. If the rise in U.S. Treasury yields spills over into the domestic bond market, it will eventually be reflected in household loan rates through bank bond rates.

The significant increase in the share of variable-rate loans is also a concern. In July, 79.0% of new household loans were variable-rate, more than double the 35.2% recorded in the same month last year. If the base rate and benchmark rates rise further, borrowers who recently took out variable-rate loans will see their interest burdens increase as well.