South Korea has been lowering interest rates, but many of the households that were supposed to benefit are instead paying more to borrow for housing.
The Bank of Korea began cutting its benchmark rate from 3.5% in Oct. 2024 and has kept it at 2.5% since May 2025. Market borrowing costs have generally fallen with it. Yet interest rates on mortgages and jeonse loans, which many South Korean renters use to finance large lease deposits, have continued to rise.
The contradiction reflects a problem South Korea has struggled with for years. Housing is deeply tied to household wealth, and sharp increases in home prices can quickly widen the divide between people who already own property and those trying to enter the market. Demand is particularly intense in Seoul and other parts of the capital region, where jobs, schools and housing demand are concentrated.
That makes housing policy politically and economically sensitive. Lower interest rates can support the broader economy, but cheaper credit can also encourage households to borrow more and push additional money into property. South Korean authorities have therefore tried to do both at once, lowering the economywide cost of money while restricting the amount of credit banks can extend to households.
The result is that lower rates have not necessarily meant cheaper housing loans.
Renters are caught in the same system because of jeonse, a lease structure common in South Korea. Instead of paying conventional monthly rent, a tenant provides the landlord with a large refundable deposit that is returned when the lease ends. Many households borrow part of that deposit from a bank.
That means a South Korean tenant can carry a sizable housing loan without owning the property. Interest on a jeonse loan effectively becomes part of the household’s housing cost, which is why tighter mortgage and household lending rules can affect renters as well as home buyers.
At the end of June, the gap between the average bank rate on jeonse loans and the Bank of Korea’s benchmark rate reached 157 bps, according to Bank of Korea data. That was the widest spread since Dec. 2022. The gap between mortgage rates and the benchmark reached 186 bps, the widest since Sept. 2022.
The divergence has continued even as banks themselves have faced lower funding costs.
COFIX, an index based on the funding costs of major South Korean banks and commonly used to price housing loans, has generally declined since Nov. 2023. Normally, a lower COFIX would help pull down rates on variable mortgages and jeonse loans.
Instead, banks raised the additional margins they charge on top of those benchmarks.
Woori Bank, one of South Korea’s major commercial banks, charged an average additional rate of 2.70% on jeonse loans at the end of July, up 52 bps from a year earlier. Shinhan Bank, another major South Korean lender, raised its average margin from 2.20% to 2.53%. NH NongHyup Bank, a major commercial bank affiliated with South Korea’s agricultural cooperative network, increased its margin from 2.95% to 3.17%.
The increases followed government efforts to restrain household borrowing as part of a broader attempt to contain housing prices and debt. Financial authorities set a target limiting annual household loan growth to 1.5%.
Banks responded by raising borrowing costs, reducing loan limits and tightening access to new credit. In effect, the Bank of Korea was making money cheaper while financial regulators were making housing credit harder to obtain.
That tension has prevented many households from receiving the full benefit of lower market rates. Banks have been able to maintain wider lending margins even as their own funding costs declined, while tenants and people buying homes to live in continued to face elevated interest payments.
The pressure may intensify during the second half of the year.
Household loans held by KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank, South Korea’s 5 largest commercial lenders, totaled about $550 billion as of July 30, up $2.7 billion from the previous month.
The banks had already exceeded their combined annual lending target submitted to the Financial Supervisory Service, South Korea’s financial regulator, by more than ₩1 trillion. That raises the likelihood that lenders will tighten household credit further as they try to remain within government limits.
The Bank of Korea has also signaled a tighter monetary stance, creating the possibility that higher official rates could eventually add another layer of pressure to housing borrowers.
An economics expert said the increase in borrowing costs could not be explained by households suddenly becoming less creditworthy or by a sharp deterioration in the value of their homes. The higher rates instead reflected regulatory restrictions on credit, leaving financial consumers to absorb the cost.
The policy dilemma is particularly difficult in South Korea because limiting housing credit does not affect only investors seeking another property. It also reaches families buying homes to live in and renters who need bank loans simply to finance a lease deposit.
South Korea lowered interest rates to ease financial conditions, but it also restricted lending to keep cheaper money from feeding another surge in housing debt and prices. Banks adjusted by charging more for the credit they were still willing to provide.
For many South Korean households, the result is a rate cut they can see in central bank policy but not in their housing bills.
