The Start of Interest Rate Cap Mortgage Loans is 'Hesitant'... "Rates Need to Rise More for a Response" (Comprehensive)

COVID-19 4th Wave as a Variable in Base Interest Rate Hike
"Difficult to Predict Interest Rate Increase Magnitude and Duration, Making Enrollment Challenging"

[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 delay in the timing of the base interest rate hike caused by the fourth wave of COVID-19 and the relatively small increase in current mortgage loan interest rates, 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 extent of interest rate increases or fix monthly repayment amounts 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. A teller at Bank A in Jung-gu, Seoul, said, "For example, only one out of seven branches received a phone inquiry from an existing customer, 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 poor."

A representative from Bank B also explained, "Some branches received two to three related inquiries, but the consumer demand for the product is still not significant according to the branch feedback," and added, "Within the banking industry, there is a sentiment that this product, which was launched once in 2019 and failed to gain popularity, is again failing to attract much interest."

Interest Rate Hike Risk Mitigation Mortgage Loans Receive 'Indifferent' 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. The ‘interest rate cap type’ limits the annual interest rate increase to 0.75 percentage points and within 2 percentage points over five years, while the ‘fixed monthly repayment type’ 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 0.15?0.2 percentage points and 0.2?0.3 percentage points in interest rates respectively compared to existing variable-rate mortgage products. The interest rate cap type is available through a special contract, and the fixed monthly repayment type can be used via refinancing.

Industry insiders cite the fourth wave of COVID-19 as a factor acting as a variable delaying the base interest rate hike, which is one reason why the two types of interest rate hike risk mitigation mortgage loans failed to gain early popularity.

On the previous day, the Bank of Korea froze the base interest rate considering the increased economic uncertainty due to the fourth wave of COVID-19. Additionally, most borrowers are aware that interest burdens on variable-rate loan products will increase if rates rise in the future, but it is difficult to preemptively subscribe to the slightly higher interest rate cap mortgage loans in preparation for future rate hikes, which also affects demand.

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

Some also argue that the 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 mortgage loan interest rates based on new contracts effective from this day are 2.49%?3.99% at Kookmin Bank, 2.65%?3.65% at Woori Bank, and 2.45%?3.66% at Nonghyup Bank. The COFIX based on outstanding balances and new outstanding balances has actually decreased compared to a year ago.

Another bank official said, "Consumer interest in interest rate cap mortgage loans will increase only when the atmosphere of rising interest rates becomes clear enough to justify that the risk mitigation benefits outweigh the additional interest costs."

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