Supposedly a Hedge Against Rising Risks... Authorities' 'Interest Rate Cap on Mortgage Loans' Misstep

Under 1 Year, Interest Rates Below 1%
Only 6 Cases Sold Across 5 Banks
Consumers Actually Suffer Losses

[Asia Economy Reporter Kwon Haeyoung] It has been a year since two types of mortgage loan products introduced through banks by financial authorities to prepare for the risk of rising interest rates were launched, but sales have completely stopped due to lack of demand. Contrary to initial predictions, the benchmark interest rate fell to the 0% range, causing financial consumers who chose these products while bearing additional costs to actually suffer losses.

According to the financial sector on the 20th, the 'Interest Rate Cap Mortgage Loan' launched last March by five banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?has recorded only six sales as of the 19th. The total sales amount is 468 million KRW. The 'Fixed Monthly Repayment Mortgage Loan,' launched simultaneously, recorded 48 sales (3.085 billion KRW) during the same period.

Considering that the outstanding balance of mortgage loans at the five major banks increased by more than 32 trillion KRW last year, these results are very disappointing. Especially since these are de facto policy products planned by financial authorities and released through banks, this outcome is seen as a clear demonstration of the financial authorities’ misstep.

The nominal purpose of the two loan products is to "mitigate interest rate rise risk." The Interest Rate Cap Mortgage Loan limits the maximum increase in the loan interest rate to within 2 percentage points over the next five years, no matter how much the rate rises. The interest rate on variable-rate mortgage loans reflects market interest rate fluctuations, but borrowers who choose this product pay additional costs (around 0.2% annually of the loan principal) and have their future interest rate increases capped. The Fixed Monthly Repayment Mortgage Loan keeps the monthly repayment amount fixed for the next 10 years, even if the loan interest rate changes. If interest rises, the principal repayment amount is reduced to lessen the borrower’s repayment burden.

At the time, the Financial Services Commission issued a press release on the product launch, stating, "There remains a possibility of an overall rise in market interest rates," and explained, "Borrowers who chose variable-rate loans, which had lower interest rates than fixed-rate loans during the prolonged low-interest period, were exposed to the risk of increased repayment burdens due to rising interest rates." It added, "We proactively introduced risk mitigation products so that variable-rate borrowers can prepare for potential loan interest rate increases."

However, the financial authorities’ prediction was clearly off the mark. According to the Bank of Korea, the interest rate on mortgage loans from deposit banks, based on new contracts, fell from 3.04% in March 2019 to 2.51% in January this year. Due to the spread of COVID-19, the Bank of Korea’s Monetary Policy Committee lowered the benchmark interest rate to an all-time low of 0.75%, and loan interest rates are expected to fall further. Some borrowers who joined the promoted products while paying additional costs are now facing the reality of having to consider "refinancing" by paying early repayment fees.

This was a foreseeable situation. When the Financial Services Commission and the Financial Supervisory Service each proposed the idea in April and July 2018, there were signs of rising interest rates, but from the second half of that year, market interest rates began to decline due to the US-China trade dispute and concerns about global economic slowdown. Subsequently, an "interest rate inversion" occurred where variable rates became lower than fixed rates. Most banks were negative about launching the products from the planning stage, citing that the product structure was complicated and did not align with market interest rate trends.

A financial industry official said, "Looking at the market interest rate trends at the time, this failure to attract customers was entirely predictable," and criticized, "This is a typical case of 'too little, too late' administration resulting from focusing on policy promotion rather than providing real benefits to financial consumers."

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