KOSPI Rises as Housing Demand Spikes 9.3 Trillion Won in Household Loans

A rise in interest in stock investments and more home sales occurred simultaneously, resulting in an increase of over 9 trillion South Korean won in household loans during the previous month. Financial regulators have implemented actions such as lowering credit loan caps for those with higher incomes and reviewing banks' adherence to residential lending contracts.

On the 11th, the Financial Services Commission stated in its *‘May Household Loan Trends’* report that total household loans from all financial institutions rose by 9.3 trillion South Korean won during the previous month. This represents about 2.7 times the growth seen in April (3.5 trillion South Korean won) and far surpasses the rise of 5.9 trillion South Korean won observed in May of the prior year.

With a notable surge in the KOSPI lately, credit loans were responsible for the growth in borrowings. Other types of loans, such as credit loans, experienced a dramatic shift—from a decline of 2 trillion South Korean won in April to an increase of 5.3 trillion South Korean won in May. Particularly, loans under bank-sector negative accounts grew substantially, moving from a drop of 600 billion South Korean won in April to a gain of 2.6 trillion South Korean won in May. Increased consumer spending during Family Month also played a role.

Residential mortgage loans rose by 4 trillion South Korean won, continuing at a high level after an increase of 5.5 trillion South Korean won in the prior month. Nevertheless, due to higher apartment sales in the metropolitan area and broader implementation of approved bulk loan programs, the growth rate of residential mortgage loans saw a slight decline from the previous month. Shin Jin-chang, Director of the Office at the Financial Supervisory Service, said, "It is possible that residential mortgage loans could grow once more as property listings get absorbed following the end of the deferral period for the supplementary capital gain tax on multi-homeowners."

Authorities have introduced an emergency management framework, which involves holding weekly gatherings with financial organizations that haven't met goals related to managing consumer debt. Significantly, the banking industry intends to cut new loan caps for individuals with higher incomes and promote early repayment of credits by waiving charges associated with repaying loans before their scheduled term. The Financial Regulatory Agency will carry out ongoing audits to confirm that banks follow previous agreements they've reached with borrowers when issuing loans, such as promises to sell existing homes, restrictions on buying more properties, and relocation requirements.

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Mortgage Rates Near 8%, Credit Loans Hit 7%

With rising bond market interest rates, bank lending rates are also climbing. As reported by the banking industry on the 11th, the fixed-rate (5-year) mortgage loans from the five largest banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—are now ranging between 4.51% and 7.5% annually as of the day before.

Only at the close of last month, the maximum interest rate stood at 7.1% per annum, yet it increased by 0.4 percentage points within just two weeks. The fixed-rate home loan rate has gone up by 1.2 percentage points since the start of this year. Following the point where the cap surpassed 7% annually towards the end of March, it is currently nearing the 8% bracket.

The yield on 5-year financial bonds, used as the standard for fixed-rate home mortgages, increased by 0.187 percentage points to an annual rate of 4.394% from the previous month’s close.

◇Banks Reducing Preferential Rates

With fixed-rate mortgage interest rates rising sharply, there has been an increase in demand for adjustable-rate mortgages, which experience more modest rate hikes. To address this trend, financial institutions are increasing their minimum lending rate requirements.

Lately, KB Kookmin Bank has lowered the favorable interest rate for its 'KB Star Apartment Mortgage Loan' (which uses a new balance COFIX-linked six-month floating rate) by 0.2 percentage points. The lending rates are calculated by combining different spreads with the benchmark rate and then deducting the favorable rate. Reducing the favorable rate leads to a higher overall loan rate.

This month, NH Nonghyup Bank increased both the 6-month floating interest rate and the 5-year fixed rate by 0.2 percentage points respectively.

If someone takes out a loan of 500 billion won with an annual interest rate of 6%, repayable over 30 years through fixed monthly payments, they would have to pay roughly 3 million won each month. But if the interest rate goes up to 8% yearly, the monthly payment jumps to approximately 3.6 million won, leading to an extra cost of about 600,000 won every month.

◇ Increasing Credit Card Balances, Higher Interest Rates

With an increase in money entering the stock market, outstanding credit loan amounts, such as those from overdrawn accounts, are growing, along with the interest rates for these loans.

The one-year credit loan interest rates offered by the five largest banks ranged between 4.35% and 6.15%, according to data from the prior day. This represents a rise of 0.29 percentage points at the higher end and 0.23 percentage points at the lower end compared to the end of the previous month, when the range was 4.36% to 5.89%.

Taking a credit loan of 100 million won, a rise in the annual interest rate from 6% to 7% increases the yearly interest cost from 6 million won to 7 million won, resulting in an additional payment of about 80,000 won per month.

This month, the overdraft account balances at the five leading banks surpassed 42 trillion won, reaching the highest point in three years and seven months since late November 2022.

Banks have raised their bond offerings this year, exceeding 100 trillion won.

A representative from the financial industry stated, "With banks boosting their bond offerings to stop deposits from moving into the stock market, financing expenses have gone up, which is now evident in lending interest rates. The pressure on 'debt-to-invest' and 'yeongkkul (soul-extended loan)' categories may intensify."

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