Another Risk of Withering... Mistimed Interest Rate Cap on Mortgage Loans

The 4th Wave of COVID-19 as a Variable in Base Interest Rate Hike

[Asia Economy Reporter Park Sun-mi] On the first day of sales for the interest rate hike risk mitigation mortgage loans, which financial authorities ambitiously prepared in anticipation of interest rate increases, customer reactions were lukewarm. Due to the fourth wave of COVID-19 delaying the expected timing of the base interest rate hike and the current mortgage loan interest rate increases being relatively small, the product did not attract much immediate attention.

According to the banking sector on the 16th, 15 banks nationwide began selling mortgage loan products that limit the interest rate increase or fix the monthly repayment amount for a certain period starting the previous day. This product was created by financial authorities to minimize risks during periods of rising interest rates. It was also offered by commercial banks in 2019 but was discontinued due to low demand amid falling interest rates.

On the first day of resuming sales after about two years, bank branches were so quiet that there were almost no inquiries at counters or by phone. An employee at Bank A’s branch in Jung-gu, Seoul, said, "For example, only one out of seven branches received phone inquiries from existing customers, and the other branches did not receive any counter or phone inquiries throughout the day," adding, "Overall, the response to the interest rate hike risk mitigation mortgage loans is weak."

A representative from Bank B also explained, "Some branches received 2 to 3 related inquiries, but the demand from consumers for this product is still not significant according to the branch-level feedback," and added, "Within the banking industry, there is a general sentiment that this product, which failed to gain popularity when introduced once in 2019, is again failing to attract much interest."

Interest Rate Hike Risk Mitigation Mortgage Loans Receive Lukewarm Response

The interest rate hike risk mitigation mortgage loans, which began sales in the banking sector from the previous day, are broadly divided into two types.

One is the ‘Interest Rate Cap Type,’ which limits the interest rate increase to 0.75 percentage points annually and within 2 percentage points over 5 years, and the other is the ‘Fixed Monthly Repayment Type,’ which reduces the principal repayment amount when interest rates rise to maintain the total principal and interest repayment amount. Both products are designed to mitigate interest rate hike risks but charge an additional interest rate of 0.15 to 0.2 percentage points and 0.2 to 0.3 percentage points respectively compared to existing variable-rate mortgage loan products.

Industry insiders cite the fourth wave of COVID-19 as one of the reasons these two types of interest rate hike risk mitigation mortgage loans failed to gain early popularity, as it acts as a variable affecting the base interest rate hike. The Bank of Korea froze the base interest rate the previous day, considering the increased economic uncertainty due to the fourth wave of COVID-19. Additionally, although most borrowers are aware that interest burdens on variable-rate loans will increase if rates rise in the future, it is difficult for them to subscribe in advance to the slightly higher interest rate cap mortgage loans in preparation for future rate hikes.

A bank official pointed out, "There is a psychological tendency to avoid high interest rates for the time being," and added, "In a situation where it is unpredictable how much and how long interest rates will rise in the future, it is not easy to pay more upfront and subscribe to mortgage loan products."

Some also argue that interest rate cap mortgage loans are not effective because many mortgage borrowers refinance after three years when there is no early repayment penalty instead of holding the loan until maturity.

According to the Korea Federation of Banks, the COFIX, which serves as the benchmark for variable-rate mortgage loans, recorded 0.92% for new contracts in June, up 0.1 percentage points from 0.82% in May. Although this is the highest level in the past year, it only increased by 0.03 percentage points compared to 0.89% a year ago. The COFIX based on outstanding balance and new outstanding balance actually decreased compared to a year ago. Another bank official said, "Consumer interest in interest rate cap mortgage loans will increase only when the interest rate hike trend becomes clear enough to calculate that the risk mitigation benefits outweigh the additional interest costs."

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