Homeowners who stretched for mortgages now face the bill five years later
People who bought homes in 2021 through 'yeonggeul' — borrowing by scraping together every last resource — are now facing heavier interest burdens as their loan rates come up for recalculation. According to financial authorities, the volume of mortgage loans (loans secured by homes) with rates resetting over the final three months of this year stands at around 165 trillion won, roughly 21 trillion won more than the previous three months. Financial Services Commission Chairman Lee Eok-won told a National Assembly Political Affairs Committee audit on Thursday that the volume of mortgages due for rate adjustments in the fourth quarter is "around 165 trillion won." Some of the hybrid and periodic mortgages taken out in 2021 with five-year fixed-rate periods are seeing their rates reset as those fixed terms expire this year. A rate reset immediately translates into a heavier principal-and-interest repayment burden.
Market rate trends show just how much the repayment burden grows after a rate reset. According to Bank of Korea statistics on weighted-average interest rates at financial institutions, the average rate on new mortgages stood at 4.66% per annum as of August this year, up 0.70 percentage points from the same month a year earlier. Compared with 2.88% in August 2021, that is a jump of 1.78 percentage points in five years. For an equal principal-and-interest repayment loan with a remaining principal of 300 million won and 25 years left on its term, a rate rise from 2.88% to 4.66% would push the monthly payment from about 1.4 million won to 1.7 million won — an increase of roughly 290,000 won. On an annual basis, that amounts to an additional burden of 3.49 million won.
The Bank of Korea's Monetary Policy Committee froze the base rate at 3.00% per annum at its rate decision meeting on the 22nd. The BOK had raised the base rate twice, in July and August. The central bank has estimated that a 0.25-percentage-point rate hike would increase interest burdens for households and businesses by about 3.3 trillion won and 3.6 trillion won, respectively.
Against this backdrop, financial authorities are pushing to expand banks' supply of long-term fixed-rate mortgages. Chairman Lee said, "For consumer loans immediately exposed to rate fluctuations, we will ease the interest burden even slightly through loan refinancing services and the right to request lower interest rates," adding, "We will think structurally about how to change incentives and how banks should handle mortgages in order to expand long-term fixed-rate lending."
Household interest burdens are growing as the rate resets on existing loans coincide with new lending's heavy skew toward variable rates.
