Fixed-Rate Portion of Mortgage Loans Soars 96 Times Amid Low Interest Rates

"Claims to Segment by Type Rather Than Prioritize Fixed-Rate Loans"

[Asia Economy Reporter Kangwook Cho] The proportion of fixed-rate mortgage loans has surged nearly 100 times in nine years. However, amid the ongoing low-interest-rate environment, there are claims that the target fixed-rate loan ratio should be segmented and set by type to better protect borrowers.

According to the report "Institutional Improvement Measures to Expand Fixed-Rate Loans" released by the Korea Institute of Finance on the 20th, the share of fixed-rate mortgage loans (including hybrid types) among domestic bank mortgage loans rose from 0.5% at the end of 2010 to 48% at the end of 2019. This represents a 96-fold increase over nine years.

This is the result of government policies aimed at increasing the proportion of fixed-rate loans to protect mortgage borrowers from interest rate fluctuation risks.

Until now, the government has made policy efforts to increase the share of fixed-rate loans because variable-rate loans significantly increase borrowers' interest burdens during periods of rising interest rates. However, the base interest rate was raised from 2.0% in July 2010 to 3.25% in June 2011, then steadily lowered to the current historic low of 1.25%. The base rate was cut by 0.25 percentage points from 1.50% in October last year to 1.25%, and was held steady at this level during the first monetary policy meeting held on the 17th of this year.

During periods with strong expectations of rising interest rates, fixed-rate loans with lower interest rate risk are preferred. However, in the current widespread low-interest-rate environment, it is argued that rather than prioritizing fixed-rate loans, it is necessary to consider segmenting and setting diverse target ratios by type.

In fact, unlike domestic mortgage loans, which are mainly long-term, overseas mortgage loans are operated in various forms depending on borrower characteristics, real estate market conditions, macroeconomic situations, and housing finance market structures. It is pointed out that Korea should also provide institutional support to enable various types of variable-rate and fixed-rate mortgage loans, similar to other countries.

Jin Lim, a research fellow at the Korea Institute of Finance, stated, "Korea should consider diversifying the target ratios for fixed-rate loans by type as part of macroprudential policy to activate housing finance and protect mortgage borrowers."

As an example, Research Fellow Lim mentioned distinguishing between pure fixed-rate mortgage loans and hybrid mortgage loans that apply fixed rates for an initial period before switching to variable rates, setting different targets accordingly. Since hybrid types can have various combinations of fixed-rate application periods (such as 5 or 10 years) and interest rate adjustment cycles (6 months, 12 months, 18 months, etc.), it is possible to increase the 'fixed-rate application period' or 'interest rate adjustment cycle' rather than just the fixed-rate proportion. Currently, financial authorities apply different recognition ratios based on the fixed-rate application period and sum them up. He also proposed setting different fixed-rate loan ratios according to income levels.

He said, "To prioritize protecting low-income borrowers from interest rate fluctuation risks, it is necessary to consider setting higher target ratios for fixed-rate loans for low-income groups."

This content was produced with the assistance of AI translation services.