The Dilemma of Rising Interest Rates: Ordinary People Facing 'False Hope'

Recent shifts in government policies regarding household loans have led to a troubling situation for ordinary citizens. Initially,

Recent shifts in government policies regarding household loans have led to a troubling situation for ordinary citizens. Initially, the government encouraged refinancing home loans to reduce interest burdens, but within just six months, the policy direction reversed, leading to higher interest rates. This blog post explores the challenges faced by ordinary people due to rising rates and the confusion stemming from the government's policy changes.

Recently, Mr. Park (46), who owns an 85㎡ apartment in Sinsoo-dong, Seoul, abandoned his plans to refinance his mortgage after checking the interest rates. Last month, he could have refinanced at an annual rate of 3.4%, but by mid-month, the rate had increased to 3.9%. Park lamented, “The current mortgage rate I have is 3.7%, which is lower than the refinancing rate. Banks have raised the thresholds for refinancing, causing my plan to save hundreds of thousands of won in interest to fall through.”

The government’s policies aimed at controlling household debt have led to increased competition among banks, resulting in higher interest rates not only for new loans but also for refinancing (switching loans). Recently, the fixed-rate refinancing interest rates for non-face-to-face home loans from the five major banks have risen to 3.5–3.95% annually. Compared to July, when the government’s loan control measures began, these rates have increased by 0.06–0.52 percentage points.

Meanwhile, the bond yields, which reflect the cost of loan procurement for banks, have actually decreased. According to the Korea Financial Investment Association, the average yield on 5-year bank bonds dropped to 3.177% on the 14th from 3.49% on July 1. This means that, theoretically, refinancing rates should have decreased by about 0.3 percentage points, but in reality, they have risen. The reason for this discrepancy is the government’s loan control measures, which have raised the barriers for refinancing. An executive from a major bank stated, “Banks are trying to curb household loan growth, but if loans are transferred from other banks, it draws negative attention from authorities. Therefore, we have no choice but to raise refinancing rates.”

The government had initially promoted a system to encourage banks to compete by lowering interest rates for non-face-to-face refinancing loans, aiming to reduce household interest burdens. However, as the problem of rising household debt worsened, the government abruptly changed its stance last month. This sudden policy shift has led to criticism that the government is trapped in self-contradiction by implementing inconsistent policies. The government’s introduction of the refinancing system in January came at a time when household loans were already increasing month-on-month for ten consecutive months.

In response to the government’s late shift to restrict household loans, banks have been raising interest rates almost daily. Over the past 50 days, the five major banks have increased interest rates on new home loans and jeonse (rental) loans a total of 19 times. KEB Hana Bank has decided to raise mortgage rates by up to 0.6 percentage points on the 22nd, while Shinhan Bank will increase rates by 0.05–0.1 percentage points for products with interest rate changes of 3 years or less. Internet bank K-Bank has raised its fixed-rate mortgage rates by 0.14 percentage points.

Given the current market, some argue that merely increasing loan interest rates may not effectively control household debt, especially with a recovering housing market. An executive from a major bank noted, “An individual committed to buying a home is unlikely to cancel their purchase just because rates have increased by 0.5 percentage points. To effectively curb household debt, fundamental measures such as expanding the calculation range of the debt service ratio (DSR) must be implemented.”

The rise in refinancing interest rates has left many ordinary people struggling with higher costs than initially anticipated. The government’s policy changes and banks' responses have caused confusion and hardship for borrowers. Addressing the household debt issue requires consistent policies and fundamental reforms to alleviate the financial burden on ordinary citizens. It is crucial for the government and financial institutions to provide effective solutions to help those affected by these recent developments.