The U.S. Federal Reserve's recent interest rate hike, the first in over three years, is raising concerns about the financial burden on domestic borrowers. With the potential for higher mortgage rates, new borrowers may also see their loan limits reduced due to the total debt service ratio (DSR) regulations.
As of September 18, the five major banks in South Korea—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—reported fixed mortgage rates ranging from 4.94% to 6.92%. This marks an increase from the end of last month, when rates were between 4.72% and 6.56%, with the lower end rising by 0.22 percentage points and the upper end by 0.36 percentage points.
Compared to the end of June, before the Bank of Korea began raising its benchmark rate, the lower end has increased by 0.57 percentage points. Although the upper end has decreased by 0.45 percentage points, this is largely due to NH Nonghyup's recent decision to lower its mortgage rates by that same amount.
Fixed mortgage rates are primarily linked to market interest rates, such as five-year bank bonds. Anticipation of U.S. rate hikes and potential domestic tightening measures have already influenced market rates, which began to rise even before the Fed's decision. With the Fed leaving the door open for further increases, domestic market rates may continue to face upward pressure.
Bank funding costs and household loan management are also key factors. As market rates rise, banks' funding costs increase. If household loan growth continues, banks may reduce preferential rates or increase margins to manage demand. Analysts predict that under these conditions, some mortgage products could approach an annual interest rate of 8%.
Park Hyung-jung, an economist at Woori Bank, stated, "Given the possibility of further rate hikes, the upward trend in market rates is likely to persist for the time being. Some loan products may see rates nearing 8%."
Higher interest rates will not only increase the burden on existing borrowers but also affect the loan limits for new borrowers. Under the DSR regulation of 40%, a borrower with an annual income of 100 million won can afford to repay 40 million won in principal and interest over a year. As rates rise, the repayment amount for the same loan increases, necessitating a reduction in the loan principal to meet DSR requirements.
For instance, assuming a 30-year equal principal and interest repayment method, a borrower with an annual income of 100 million won would have a loan limit of approximately 620.94 million won at a 5% interest rate. If the rate rises to 6%, the limit drops to about 555.97 million won, a decrease of 64.97 million won. At a 7% rate, the limit further declines to about 510.3 million won, nearly 120 million won less than at 5%.
A borrower with an annual income of 60 million won would see their loan limit decrease from approximately 37.256 million won at 5% to about 33.358 million won at 6%, a reduction of 3.898 million won. This means that even with the same income, the amount available for purchasing a home can vary by millions depending on the interest rate.
In reality, the new loan limits may be even lower. In regulated areas of the metropolitan area, a stress DSR system is applied to account for potential future rate increases when determining loan limits. If borrowers have other debts, such as credit loans or auto financing, their mortgage limits will be further reduced.
Kim Hyo-sun, a senior real estate expert at KB Kookmin Bank, noted, "The mid-priced and essential housing market, which relies heavily on loans, is likely to be more significantly affected by interest rates. It is time to conduct a cash flow assessment based on conservative assumptions regarding the upper limits of interest rates."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.