Mortgage Rates Approach 7%... the 8% Era Is Just Around the Corner

The interest rate on mortgage loans backed by homes has risen to just below 7%. As of Thursday, five-year fixed-rate mortgage rates at South Korea's five major commercial banks ranged from a low of 5.21% to a high of 6.89%. With the interest burden growing, prospective borrowers need to keep a close eye on the direction of rates.

The backdrop to the upward trend in mortgage rates is the current cycle of benchmark rate hikes. The U.S. Federal Reserve raised its benchmark rate by 0.25 percentage points and has left the door open to further hikes within the year. Against this backdrop, some expect the Bank of Korea to raise rates again as well this year.

When benchmark rates rise, bank bond yields, a key benchmark for setting mortgage rates, come under upward pressure. According to the Korea Financial Investment Association's bond information center, the yield on five-year bank bonds, the basis for calculating fixed-rate mortgages, stood at 4.568% as of Wednesday. That is about 0.2 percentage points higher than nine months ago, and the figure recently topped the 4.6% mark. Park Hyung-jung, an economist at Woori Bank, said, "If bank bond yields move toward or above 5%, some loan products on the market could see rates reach 8%."

When rates rise amid strong demand for loans to purchase homes, the interest burden on borrowers grows heavier.