[Edaily Reporter Jeong Byeong-muk PARK JONG-HWA ] With household loan interest rates soaring, the Bank of Korea has implemented another hike in the benchmark interest rate, and those who have taken on debt to invest in real estate and stocks—known as “debt investors” and “all-in investors”—are expected to face even greater pressure. This is because the benchmark interest rate has risen again, even as forecasts suggest mortgage rates could climb into the 8% range. Amid the burden of loan repayments, the real estate market is expected to see a prolonged lull in transactions and a continued shift from jeonse (lump-sum deposit leases) to monthly rent.

According to the financial sector on the 27th, the interest rates on 5-year fixed-rate mortgage loans at the five major commercial banks (Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup) range from 4.72% to 7.17% per annum. Compared to the beginning of the year (3.77%–5.87%), the lower end has risen by 0.95 percentage points, and the upper end by 1.30 percentage points. Some observers are even predicting that mortgage rates could rise to the 8% range. Interest rates on jeonse (lump-sum rental deposit) loans have also risen from 2.96–5.46% to 3.49–6.19%. Interest rates on unsecured loans (based on 6-month financial bonds) are also approaching the 6% range at the upper end.

The market has already factored in the benchmark rate hike, and interest rates continue to rise. The yield on 5-year financial bonds—which serves as a benchmark for calculating fixed-rate mortgage rates—rose to 4.3955% on the 26th, up from 4.3730% at the beginning of the month. The COFIX (Cost of Funds Index), which serves as the benchmark for variable-rate mortgage loans, has also risen for four consecutive months, reaching 3.18% annually. This is the highest level since January of last year. A financial industry official stated, “As the benchmark interest rate rises, banks’ funding costs increase, so it is highly likely that lending and deposit rates will rise as well.”

If the base rate drives up market interest rates, the burden on borrowers will grow even heavier. Borrowers who took on excessive debt to invest in stocks or real estate, as well as vulnerable borrowers lacking the ability to repay interest, are particularly at risk of being hit hard by rising interest rates. Taking a borrower who has taken out a 600 million won loan as an example, calculations show that a 0.25 percentage point increase in the loan interest rate would result in an additional annual burden of 1.5 million won, or more than 120,000 won per month. If mortgage rates in the 8% range become a reality, the total annual interest on a 600 million won loan would reach 48 million won.

In data submitted last month to Rep. Lee Jong-wook of the People Power Party, the Bank of Korea estimated that a 0.25 percentage point increase in the loan interest rate would raise the total interest burden on household loans by 3.3 trillion won, based on first-quarter figures. For mortgage loans, the annual interest burden per borrower is expected to increase by 296,000 won, from an average of 5,843,000 won to 6,139,000 won.

The real estate market is also bound to be affected by rising interest rates. In a market already frozen by rising home prices and government lending restrictions, the lull in transactions is expected to continue for some time. While it is unlikely that home prices will fall immediately due to a shortage of housing supply and difficulties in securing jeonse and monthly rent, buying demand is expected to shrink as rising interest rates make it harder to secure housing funds. Areas with a high concentration of mid- to low-priced homes—where reliance on loans for housing purchases is high—are expected to be relatively more affected by interest rate hikes, leading to a slowdown in the pace of price increases. In the rental market, there is also significant concern that landlords will pass on their increased interest burden to tenants in the form of higher monthly rent.

Ham Young-jin, head of the Real Estate Research Lab at Woori Bank, predicted, “As interest rates rise, the burden of jeonse loans will also increase, so we expect an acceleration in the shift to monthly rent, taking into account the conversion rate from jeonse to monthly rent.” He added, “Landlords are likely to prefer monthly rent over jeonse due to the increased burden of loan interest and taxes, which will lead to a rise in guaranteed monthly rent options such as ‘banjeonse’ (a hybrid of jeonse and monthly rent).” He further noted, “In the housing supply market, rising construction costs could lead to higher financing costs—such as those associated with project financing (PF)—which could create pressure on the supply side, potentially resulting in higher pre-sale prices.”