Market interest rates have surged sharply under the impact of the prolonged Iran war, pushing fixed-rate mortgage rates at major commercial banks past 7%. As of the 27th, mortgage rates at KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup banks stood at 4.41% to 7.01% per annum, the highest levels since October 2022 when rates were climbing steeply in the wake of the Ukraine war. The Bank of Korea (BOK) has continued to hold its base rate steady, but with inflation intensifying from the Middle East, speculation is growing that the monetary policy stance could shift back to tightening. Rates appear likely to continue rising for the time being. Adding to the unease in global financial markets, U.S. 10-year Treasury yields climbed as high as 4.46% intraday on the same day, while Japan's 10-year yield hit 2.385%, its highest in 37 years.
The rapid rate increase is a devastating blow to so-called "yeongkkeul" borrowers — those who scraped together every last resource to buy homes with loans. To make matters worse, when the contribution rate for the Housing Finance Credit Guarantee Fund is restructured next month, rates on loans exceeding 500 million won ($370 million) will rise by up to 0.25 percentage points for the time being. As the interest burden grows on mortgage loans, which account for more than 60% of household debt, the risk of household loan defaults rises significantly. According to the BOK's recent Financial Stability Report, the number of "high-risk households" — those unable to repay their debts even after selling all their assets — surged 18.9% year-on-year to 459,000 as of March last year. Vulnerable borrowers such as small-scale self-employed business owners are also a concern. According to BOK estimates, every 0.25 percentage point increase in lending rates adds 1.8 trillion won ($1.3 billion) to the interest burden on the self-employed. If the pace of rate increases steepens, delinquency risks will inevitably worsen. Corporations, already weakened by deteriorating earnings and diminished debt-servicing capacity, could also be pushed toward insolvency as interest costs mount.
With Middle East uncertainty escalating — including U.S. preparations for a ground offensive — colliding with household debt swollen by leveraged home buying and "bit-tu" (borrowing to invest in stocks), and mounting corporate debt, financial instability could become a detonator that shakes the entire economy. Preemptive responses to latent risks are essential to prevent the shock of rapidly rising rates from cascading into systemic financial risk. Closely monitoring market anomalies and strengthening capital soundness at financial institutions are the most basic of basics. For self-employed individuals beyond recovery and marginal companies, authorities must move beyond stopgap financial support that only inflates debt bombs and pursue orderly restructuring as well.