Mortgage Rates Drop Below 4%, High-Interest Loans Surge

The focus of mortgage rates is shifting rapidly to higher levels. While loans with rates below 4% have virtually disappeared from major banks, the share of loans with rates above 4.5% has surpassed half. As banks face rising funding costs, both new loans and the interest burden for existing borrowers facing rate adjustments are expected to increase.

According to the financial sector on October 19, the share of new installment mortgage loans below 4% among the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was only 0% to 0.4% as of August this year. Shinhan Bank reported 0.4%, Woori Bank 0.3%, and KB Kookmin Bank 0.1%, while Hana Bank and NH Nonghyup Bank had no transactions in this rate range. In the same month last year, the share ranged from 30.2% to 53.1%. Over the past year, Shinhan Bank saw the smallest decrease at 29.8 percentage points, while Hana Bank experienced the largest drop at 53.1 percentage points.

The decline in low-interest loans has been replaced by an increase in high-interest loans. The share of mortgage loans with rates above 4.5% among the five major banks surged from an average of 2.94% in August last year to 87.22% in August this year. The share of loans with rates above 5% also rose from 0.24% to 34.18% during the same period.

The rapid rise in new mortgage rates is attributed to increasing market interest rates and banks' funding costs. The key benchmark rate for fixed and mixed-rate mortgages, the five-year bank bond (unsecured, AAA), rose from 2.836% at the end of August last year to 4.294% as of October 16. The COFIX (Cost of Funds Index), which serves as the benchmark for variable-rate mortgages, reached 3.43% in September, the highest level in two years and three months since June 2024 (3.52%).

As a result, not only new loans but also the interest burden for existing borrowers may increase. According to data received by Han Chang-min, a member of the National Assembly's Political Affairs Committee, from the Financial Supervisory Service, the outstanding balance of mortgage loans among 19 domestic banks, excluding policy mortgages, that are set to change rates in the fourth quarter is estimated at approximately 165 trillion won, an increase of about 21 trillion won from the 143.9 trillion won scheduled for rate changes in the third quarter.

With more loans approaching their rate adjustment period and reflecting the rise in market interest rates, borrowers may face increased repayment burdens. For instance, if a loan balance of 500 million won reflects the COFIX increase of 0.25 percentage points, the annual interest would rise by 1.25 million won if the balance remains constant.

A representative from a commercial bank stated, "Recently, the variable-rate mortgage loans at branches are in the range of 4% to the upper 5% levels, while new fixed-rate mortgage loans are reaching the mid-5% range. The increase in funding costs is being gradually reflected in loan rates, indicating that high-interest conditions are likely to persist for the time being."