The Financial Services Commission's (FSC) early-year overhaul of contribution rate standards for the Housing Finance Credit Guarantee Fund — switching the basis from loan terms to loan amounts — was designed to weaken banks' incentive to extend large mortgage loans. The goal was to curb demand for high-priced housing. To that end, authorities replaced the previous system, which differentiated rates by loan conditions such as floating versus fixed rates, interest-only versus amortizing, and lump-sum versus installment repayment, with a framework based on loan size.
However, the policy shift is increasingly likely to translate into heavier burdens for borrowers in the near term. According to financial industry sources on the 29th, major commercial banks have decided — or are reviewing plans — to adjust mortgage rates from the first of next month in line with the revamped contribution rate structure. Some banks have reportedly informed loan solicitors of the new spread levels that will apply by loan amount starting next month. "Changes to mortgage rates reflecting the revised Housing Finance Credit Guarantee Fund contribution rate criteria are scheduled for the first of next month," an official at a commercial bank said.
Market observers say the rate increase could be particularly steep for new fixed-rate mortgages. Under the previous framework, a contribution rate of 0.05% applied regardless of loan size as long as borrowers met certain conditions — a fixed rate of five years or longer and amortizing repayment without a grace period. Starting next month, however, a rate of 0.27% will be levied on loans exceeding 249 million won, the average amount of housing loans subject to the fund's contributions last year, and 0.3% on loans exceeding twice that threshold at 498 million won.
"The share of borrowers opting for fixed rates has been rising, and quite a few had been paying contribution rates of just 0.01% to 0.05% thanks to bank-specific differential and preferential discounts," another commercial bank official said. "For new mortgages of 200 million won or more, interest rates could rise by roughly 0.1 to 0.2 percentage points."
The problem is that the timing of the overhaul is far from ideal. Market interest rates have been climbing rapidly as prolonged tensions from the Iran conflict overlap with tightening concerns following the nomination of a new Bank of Korea (BOK) governor candidate. According to the Korea Financial Investment Association, the yield on five-year bank bonds (unsecured, AAA-rated) — the benchmark for fixed-rate mortgages — reached 4.119% as of the 27th of this month. The rate had stood at around 3.572% at the end of last month but surged repeatedly this month, jumping to the 4.1% range.
Top-end mortgage rates at major banks have already crossed the 7% line. According to financial industry data, fixed-rate mortgage ranges at the five largest banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 4.410% to 7.010% as of the 27th. It is the first time fixed rates at the five major banks have exceeded 7% since October 2022, a gap of three years and five months.
Market participants point to a gap in the timing of the revised Banking Act's enforcement. In December last year, the National Assembly passed the amendment — led by the main opposition Democratic Party of Korea — that bars banks from reflecting statutory costs such as deposit insurance premiums and contributions to the Korea Inclusive Finance Agency in their spread calculations, and limits the pass-through of contributions to guarantee funds including the Housing Finance Credit Guarantee Fund to no more than 50%.
Yet because the effective date was set at six months after promulgation — July — new loans originated between April and June can still have the revised, higher contribution rates fully reflected in their interest rates. "Higher spreads can be applied to new loans issued before the amended law takes effect," a banking industry official stressed. "After the amendment is enforced, however, there will be limits on how much can be passed through to spreads."
Industry observers warn that the revamped rate structure could hit hardest among end-user buyers of apartments priced at 1.5 billion won or below in the Seoul metropolitan area — who can currently borrow up to 600 million won — and those priced between 1.5 billion and under 2.5 billion won, who can borrow up to 400 million won. Financial authorities are expected to announce aggressive household loan volume targets this week alongside regulations on loan maturity extensions for multi-property owners, suggesting the barrier to homeownership will remain elevated for the time being. "Considering the fallout from the Iran conflict, it will not be easy for lending rates to come down anytime soon," a financial industry official said. "The burden on ordinary citizens is bound to grow."
