Interest rates are going up again… What about a variable interest rate for borrowers 80?

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80% of floating rate loans in March
The fixed-type main debt is in the mid-6%… Floating rate rises likely to accelerate
Woori and KB Kookmin Bank lower interest rates on hybrid main loans

photo = Yonhap News

While lending rates are on the rise, it is predicted that the Bank of Korea will further raise the base rate this month. This is because the US has predicted an aggressive rate hike, and the domestic inflation rate is expected to continue to the 4% level this year. As the proportion of floating rate borrowers is high, the interest burden on borrowers is expected to increase.

According to the banking industry on the 19th, KB Kookmin Bank applied the variable interest rate for the main loan to 3.54 to 5.04% per annum, up 0.12 percentage points per year. The variable interest rate for Woori Bank’s main loans also rose 0.12 percentage points to 3.80-5.01%. As a result, the top interest rate of the main loan has entered the 5% range.

As a result, the interest burden of borrowers who choose variable interest rates is expected to increase. According to the Bank of Korea, variable rate loans accounted for 80.5% of new household loans in March.

Although it is common to choose a fixed interest rate during interest rate hikes, it is interpreted that borrowers who felt burdened by the large difference between fixed and variable interest rates chose variable interest rates. As of the previous day, the fixed-type main loan interest rates of the five major commercial banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank, ranged from 4.00 to 6.44 percent, with the highest interest rate reaching the mid-6 percent range.

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Although the difference between the variable rate and the fixed rate is more than 1 percentage point, the variable rate is expected to rise further in the future. According to the Federation of Banks, Cofix’s new transaction amount in April was 1.84%, up 0.12 percentage point from the previous month. This is the highest since May 2019 (1.85%).

Following the recent big step in raising the key interest rate by 0.5 percentage point, the US announced that it would take another big step in the future. As the U.S. raises interest rates, it is predicted that the pace of rate hikes in Korea will accelerate to prevent capital outflows caused by interest rate inversions.

The domestic inflation rate also supports this. The Korea Development Institute (KDI) raised its inflation forecast for this year to 4.2% from its November forecast of 1.7% (1.7%). He pointed out that export and investment conditions are deteriorating due to global supply chain disruption and economic slowdown. Recently, Lee Chang-yong, governor of the Bank of Korea, suggested a major interest rate hike for the first time, saying, “It is not at the stage to completely rule out the possibility of a big step in the future.”

It is also predicted that Korea’s base interest rate will rise to 2.5% per annum this year. JP Morgan predicted that the BOK will raise the base rate four more times this year, including this month, and the base rate will reach 2.5% at the end of the year.

If the base interest rate continues to rise, the borrower’s interest burden will inevitably increase. According to the BOK, when the base rate rises by 0.25 percentage points, it is estimated that households’ annual interest burden will increase by about 3.3 trillion won. It is about 160,000 won per borrower. As the actual loan interest rate is the base rate plus the additional interest rate, the actual debt burden may be greater than this.

It’s time for new borrowers to consider choosing a fixed rate. Recently, banks have expanded their incentives with fixed interest rates. From the 12th, Woori Bank lowered its five-year variable interest rate products by 0.4 percentage points each. Target products include Woori Apartment Loan, Woori Real Estate Loan, and Woori Won Housing Loan. This applies to all customers who are taking out new loans or extending their loan term.

A 5-year variable rate loan is actually a fixed rate loan because the interest rate change cycle changes every 5 years. The general variable interest rate loan is linked to the Cofix, and the interest rate changes every 6 or 12 months. As the BOK is expected to raise the base rate further this year, the impact of the rate hike is inevitable.

KB Kookmin Bank will also implement the interest rate cut on main loans, which it started in March, until the end of this month. The fixed interest rate for the main loan (mixed type) was cut by 0.45 percentage points.

The reason why commercial banks are lowering the fixed rate main loan interest rate is interpreted as an intention to induce the demand for main loan loans toward the fixed rate. A commercial bank official said, “It is aimed at reducing the customer’s interest burden during interest rate hikes.”

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Eunbit Koh, reporter at Hankyung.com silverlight@hankyung.com

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