[Edaily Reporter Lee Soo-bin] Amid high exchange rates and inflation, the Bank of Korea has strongly signaled a benchmark interest rate hike in July, and market interest rates are rising rapidly as they preemptively reflect expectations of the hike. As a result, the upper limit for mortgage rates has surpassed 7%, and credit loan rates have broken through the mid-5% range, suggesting that borrowers’ interest burdens will increase. However, “debt-fueled investment” continues, with the outstanding balance of personal loans increasing by approximately 1 trillion won over three business days.

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According to the financial sector on the 7th, the fixed-rate

(based on 5-year bank bonds) at the five major banks (KB Kookmin, Shinhan,Hana, Woori, and NH Nonghyup) stood at 4.39% to 7.33% per annum as of the 5th (based on 5-year bank bonds). Compared to the figures from the 8th of last month (4.40% to 7.00% per annum), the upper limit of interest rates has risen by 0.33 percentage points in just one month. Compared to the end of December last year (3.93%–6.23%), the upper limit has jumped by 1.10 percentage points and the lower limit by 0.46 percentage points over the past five months. Interest rates on unsecured loans (6-month term) also rose to 4.02%–5.61% per annum, with the upper limit surpassing the mid-5% range. This trend continues the upward trajectory seen since the end of last year (3.90–5.36%).

This rise in interest rates is driven by a sharp increase in bank bond yields, which serve as the benchmark for calculating bank loan rates. On the 5th, the yield on 5-year unsecured AAA-rated bank bonds stood at 4.413%, up 0.4 percentage points from 4.019% on the 8th of last month.

Market interest rates, including those on bank bonds, have been on a steady upward trend since the outbreak of the war in the Middle East. Additionally, pressure for interest rate hikes has intensified as the consumer price index (CPI) rose 3.1% in May—the highest level since March 2024 (3.1%)—and the won-dollar exchange rate soared to the 1,550 won range. Shin Hyun-song, Governor of the Bank of Korea, effectively signaled a benchmark interest rate hike at the Monetary Policy Board meeting on the 28th of last month, the first he presided over since taking office.

The market is increasingly expecting the Bank of Korea to raise the benchmark interest rate in July and strengthen its tightening stance to stabilize prices and the exchange rate. Consequently, market interest rates are reacting preemptively, and the upward trend in loan rates is expected to continue.

The problem is that even amid rising loan rates, the fervor for “debt-fueled investing” among individual investors shows no signs of cooling. Borrowers who have engaged in leveraged investing, expecting investment returns higher than loan interest rates, could face both increased investment losses and a heavier interest burden if the stock market corrects.

In fact, the outstanding balance of personal credit loans at the five major banks rose from 106.5154 trillion won at the end of May to 107.5048 trillion won on the 4th of this month—an increase of approximately 1 trillion won in just three business days. This amounts to an average daily increase of about 330 billion won. Compared to the 2.1741 trillion won increase over the past month, when warning signs about rising credit loans first emerged, the current pace of growth is steep.

The balance of margin trading loans, a key indicator of debt-fueled investing, is also growing rapidly. The margin trading loan balance surpassed 38 trillion won for the first time on the 29th of last month. Although it has since decreased slightly, it remained at a high level of approximately 37.7376 trillion won as of the 4th.

Financial authorities are on alert regarding the spread of debt-fueled investing. The Financial Services Commission convened a review meeting with financial investment industry officials on the 5th after noticing signs of overheating in the recently launched single-stock leveraged exchange-traded funds (ETFs) for Samsung Electronics and SK Hynix. The Financial Supervisory Service has also launched an investigation into Mirae Asset Securities, which sold subscriptions for the SpaceX IPO, to determine whether there were instances of mis-selling or false and exaggerated advertising.