Era of Cheap Loans Coming to an End

  • By Kim A-sa

    September 01, 2021 08:39

    The days of ultra-cheap loans are numbered after the Bank of Korea hiked the base interest rate to 0.75 percent last week and banks froze or restricted home loans.

    An interest rate hike typically dampens demand for real estate, but analysts are divided on their outlook for housing prices. Some forecast a steep drop as more and more people who borrowed money to buy their homes put them up for sale due to the rising interest burden, while others expect them to keep rising since interest remains comparatively low.

    But the rate hike is expected to have a deflating effect on the housing and stock market bubble. Rather than borrowing heavily to invest in real estate and stocks, more and more people are expected to manage their risks. One financial adviser cautioned, "Reduce your debts at all costs and avoid excessive investments when interest rates rise."

    Ham Young-jin at real estate app Zigbang said, "If demand for real estate investments using borrowed money declines, overall transaction volume will drop even further, resulting in at least a slowdown in apartment price growth."

    Koh Jong-wan at the Korea Asset Management Institute said, "If we see two or three more rate hikes, we can pretty much say goodbye to this bull run on the stock market." 

    Real estate experts warn against highly leveraged purchases of apartments and short-term investments seeking quick profits.

    But Kim Kyu-jung at Korea Investment and Securities said, "It could become more difficult to borrow money in the future, so it could be beneficial to purchase a home for long-term residence using a housing loan that's still affordable now."

    Other financial experts said a base rate hike is based on expectations of an economic recovery and could open new investment opportunities. Kim Hyun-sub at KB Kookmin Bank said, "In times like this, it's important to spread out your investment by parking your money in different areas of expected growth."

    Financial advisers recommended people minimize their debt and have cash ready to invest in stocks once the market deflates in the short term. Experts also advise investing money in short-term deposit and savings accounts, whose interest rates will also increase now, especially those that can be extended month-by-month.

    "Until now, borrowing heavily and investing the money might have been effective, but we need to secure our cash now," said Moon Eun-jin at KEB Hana Bank.

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