"From the 15th, Mortgage Loans Available with Reduced Interest Rate Hike Risk"

'Interest Rate Cap Type' Limiting Interest Rate Increase to Within 2%p Over 5 Years
'Fixed Monthly Repayment Type' Maintaining Total Principal and Interest Repayment Amount Even When Interest Rates Rise

[Asia Economy Reporter Sunmi Park] Mr. A, who borrowed 200 million KRW with a variable interest rate for 30 years and is currently repaying principal and interest at a rate of 2.5%, paying 790,000 KRW monthly. Going forward, Mr. A will be able to join an interest rate cap special contract that limits the increase in interest burden to 0.75%p per year even if interest rates rise sharply. If the interest rate rises by 2%p after one year and he maintains the variable rate, he would have to pay 1,006,000 KRW, but if he chooses the interest rate cap type, the repayment burden decreases to 884,000 KRW.

Starting from the 15th, banks will offer mortgage loans with mitigated interest rate rise risk.

On the 14th, the Financial Services Commission, Financial Supervisory Service, and the Korea Federation of Banks announced that mortgage loan products that limit the interest rate increase for a certain period or fix the monthly repayment amount, called ‘Mortgage Loans with Mitigated Interest Rate Rise Risk,’ will be reintroduced. From the 15th, these products will be available at 15 banks nationwide, including Kookmin, Shinhan, Hana, Woori, Nonghyup, Industrial Bank of Korea, SC, Citi, Daegu, Busan, Gwangju, Jeju, Jeonbuk, Gyeongnam, and Suhyup.

As market interest rates rise, some borrowers with variable rate loans are concerned about increased interest repayment burdens. Accordingly, the 15 banks plan to resume offering mortgage loan products that limit the increase in loan interest rates for a certain period or fix the monthly repayment amount, thereby enhancing borrowers’ options. This product was initially launched in early 2019 but was discontinued due to low demand as interest rates declined.

Interest Rate Cap Type or Fixed Monthly Repayment Type

There are two main types of mortgage loans with mitigated interest rate rise risk.

One is the interest rate cap type, which limits the interest rate increase to 0.75%p annually and within 2%p over five years, and the other is the fixed monthly repayment type, which reduces principal repayment when interest rates rise to maintain the total principal and interest repayment amount.

First, if you apply for the interest rate cap special contract that limits the interest rate increase for five years, the increase is capped at 0.75%p annually and within 2%p over five years. Existing borrowers can add this special contract to their current loans without separate screening by paying an additional 0.15~0.2%p annually, and new borrowers taking out variable rate mortgage loans can also apply. Notably, the annual interest rate cap was reduced from 1%p to 0.75%p, and borrowers can cancel the special contract after joining if they wish, thereby strengthening consumer choice.

If you apply for the fixed monthly repayment type mortgage loan that maintains a constant monthly repayment amount for 10 years, you can reduce principal repayment to keep the total monthly principal and interest repayment amount steady. This is available at an interest rate 0.2~0.3%p higher than variable rates, and existing borrowers can also use it through refinancing. Even if interest rates rise, users will not experience an increase in monthly repayment burden over a long period (10 years), and if interest rates fall, there is an effect of faster principal repayment.

The financial authorities are providing policy incentives considering that these two types of mortgage loans with mitigated interest rate rise risk significantly reduce borrowers’ risks from rising interest rates.

A financial authority official stated, "Banks plan to review the operation of this product over the next year and decide on its extension. We will continue to supplement measures to respond to the increased household burden from rising interest rates, such as introducing preferential programs for low-income earners, operating ultra-long-term policy mortgages, and expanding supply of low-income and mid-interest rate loans."

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