In general, when interest rates are expected to rise in the future, household loans with fixed rates rather than floating rates increase due to concerns about the interest burden.
This is because the floating rate is considerably lower than the fixed rate right now, and lenders see the possibility of a surge in interest rates low amid the prolonged COVID-19 hit and low interest rates.
According to statistics from the Bank of Korea on the 2nd, fixed rate loans accounted for 18.5% of new household loans by deposit banks in June. Compared to May (22.0%), it fell by 3.5 percentage points (p) more in one month,
In other words, 81.5% of new household loans follow variable interest rates, which is the highest in seven years and five months since January 2014 (85.5%).
Compared to the average proportion of variable interest rates based on new household loans in last year and 2019 (63.8%, 53.0%), it is a 20-30% point jump in just one to two years.
Even based on the total balance of household loans, not new loans, the fixed rate loan ratio (27.3%) in June was the lowest level in six years and nine months since September 2014 (27.2%).
Of the remaining household loans, 72.7% are floating rate loans, which means that this ratio is also the highest in six years and nine months.
Financial institutions explain that it is unusual for the popularity of the fixed rate to fall further during a period of rising interest rates.
Moreover, the BOK’s base rate hike is imminent in the next few months, and the government is warning of the possibility of a surge in the household loan interest burden due to the daily increase in interest rates, but it has little effect on borrowers’ interest rate choices.
The fundamental background of this phenomenon is, above all, that the gap between the current fixed rate and the variable rate is larger than the potential increase in the variable rate over the next several years that borrowers can expect.
As of the 16th of last month, the four major commercial banks, KB Kookmin, Shinhan, Hana, and Woori, had a variable interest rate of COFIX-linked mortgage loans at the level of 2.49 to 4.03% per annum.
However, the interest rate for a hybrid (fixed-rate) mortgage loan that follows the 5-year bank bond interest rate, not the Cofix, is 2.89-4.48%, higher at the top and bottom than the variable rate by more than 0.4 percentage points.
Fixed interest rates are directly affected by index interest rates, such as 5-year bank bonds, which have recently risen rapidly. However, the rate of rise is not as fast as the fixed rate, and the gap is widening as the variable interest rate, which is based on the Cofix, reflects the bank’s comprehensive procurement costs, such as the deposit (deposit) interest rate.
An official from a commercial bank said, “Based on the interest rate range of the four major banks, it is about 0.4 percentage points, but within individual banks, there are cases where the fixed interest rate is 0.7 to 0.8 percentage points higher than the variable interest rate for loans under the same conditions.”
Another bank official also explained, “Recently, there has been a time when the gap between fixed and variable rates has widened by nearly 1 percentage point.
For the same reason, major commercial banks all at once on the 15th of last month are ignoring the ‘Special Loan for Higher Interest Rate’.
Although the launch was based on the recommendation of the financial authorities to ‘prepare a product that can reduce the risk and shock of future interest rate rises’, there are few special contracts signed with major commercial banks for about two weeks.
An official from one of the five major commercial banks said, “There is no record of signing a special interest rate cap yet,” and “I know that other banks are in the same situation.”
In terms of the initial atmosphere of the release, the situation is similar to that of 2019. In early 2019, financial authorities and banks introduced a loan product with a similar structure, but with interest rates lowered, almost no sales were made so far.
In a nutshell, a special loan with an interest rate ceiling is a structure in which a ‘cap’ is applied so that the interest rate cannot be raised above a certain level when the interest rate rises rapidly.
In the case of this special product, if the remaining loan period is between 3 years and less than 5 years, the upper interest rate limit is applied to the entire remaining period. In the meantime, no matter how high the interest rate rises, the rate of increase in interest rates for special borrowers is limited to 1.5 percentage points (p) or less compared to the base rate applied at the time of signing the special contract. However, in order to receive this upper limit, an additional (premium) interest rate of 0.15 percentage points per annum must be paid.
If the remaining period of the loan is more than 5 years, the special agreement for the upper limit of the interest rate is possible up to 5 years, and the additional interest rate is 0.2 percentage points per annum. The interest rate applied for 5 years cannot be higher than the base rate at the time of the special contract by more than 2.0 percentage points.
In both cases, the increase in the annual interest rate of the special loan with the upper limit of interest rate is suppressed to a maximum of 0.75 percentage points, regardless of the remaining loan period.
A commercial bank official said, “The unpopularity of the special interest rate cap product is the same reason that fixed interest rates are ignored. With the observation that the economy is unlikely to recover as quickly as expected, there seems to be a strong perception of how much interest rates will need to rise in the future.”
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