Mortgage rates in South Korea are rapidly rising, with KEB Hana Bank’s rate hitting a 34-month high as the country’s commercial banks are actively seeking ways to compensate for falling profits in a prolonged record-low interest rate environment.

On Wednesday, KEB Hana Bank raised the rate on its key fixed-rate mortgage loans by more than 100 basis points to 5.18 percent from 4.16 percent set forth in July. That’s the highest level in borrowing costs for the bank’s five-year fixed-rate mortgages since January 2014, when the rate stood at 5.33 percent and the Bank of Korea’s policy rate at 2.5 percent.

KB Kookmin Bank’s rate on its five-year fixed-rate mortgages also surged to 4.48 percent this month from 3.98 percent in August. A series of hikes in mortgage rates come even though the country’s key interest rate stays at a record low of 1.25 percent.

Market observers note that local banks grappling with squeezed profit margins in the prolonged low interest rate environment raced to up their mortgage rates after the financial authorities required banks to impose stricter screening for some type of loans to curb the country’s snowballing household debts.

Constructors are worried that latest banks’ rate hikes on top of the government’s tighter restrictions on the property market would sap demand for new homes. Housing market experts also warn that fast-growing rates would trigger a hard landing in the country’s property market, which has been a major driver behind the country’s economic growth in recent years.

"It is shocking that mortgage rates exceeded 5 percent,” said Kim Deok-rae, a researcher at Korea Housing Institute. “I am concerned that this faster-than-expected rate increases would deal a heavy blow to the housing market.”

Banks, however, say the mortgage rates have climbed following the hike in the yield of the five-year financial bond on growing expectations for a rate hike by the U.S. Federal Reserve.

By Kim Gi-jung and Park Yoon-ye

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]