Financial Authorities Lead 'Interest Rate Cap Mortgage Loans' Becoming Ineffective Again (Comprehensive)

'Continued "Interest Rate Inversion" Phenomenon... Not Many Borrowers Using It'

[Asia Economy Reporter Kwangho Lee] The 'Interest Rate Rise Risk Mitigation Mortgage Loan' product, reintroduced after two years, is being ignored in the market. Despite extensive promotion by financial authorities, the total number of subscriptions at major commercial banks is a meager 15 cases, reflecting poor performance. This is because, in a situation where the mixed-type (5-year fixed) mortgage loan interest rate remains lower than the variable mortgage loan interest rate?a phenomenon known as 'interest rate inversion'?there are few borrowers willing to use the interest rate rise type mortgage loan product that includes an additional margin rate. Banks also seem reluctant to actively recommend subscriptions for this reason.

Reintroduced by Financial Authorities After 2 Years... Only 14 Subscriptions in 19 Days

According to the banking sector on the 3rd, as of the 2nd, the subscription performance for interest rate cap mortgage loans at the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 14 cases (2.137 billion KRW). Among these, two banks had no subscription records at all.

Under the leadership of financial authorities, 15 banks launched the interest rate cap mortgage loan product on the 15th of last month. This product limits the annual interest rate increase to 0.75 percentage points and the increase over five years to within 2 percentage points. However, an additional margin rate of 0.15 to 0.2 percentage points applies.

For example, a borrower who took out a 200 million KRW 30-year variable mortgage loan (2.5% annual interest rate, monthly principal and interest payment of 790,000 KRW) and subscribes to the interest rate cap mortgage loan special contract would, even if the interest rate rises to 4.5% (monthly 1,006,000 KRW) after one year, only pay an interest rate capped at 3.4% (2.5% + 0.75% + 0.15%, monthly 884,000 KRW). Conversely, if the interest rate falls to 2.0%, the borrower only needs to pay the additional margin rate of 0.15 percentage points, so the benefit of reduced interest due to rate drops is largely preserved.

Nevertheless, the product receives little attention in the market because the gap between mixed and variable mortgage loan interest rates is judged to be larger than the expected future increase in variable mortgage loan interest rates.

Variable Mortgage Loan Rates Stable, No Customers Willing to Pay Margin Rate to Switch

Variable mortgage loans typically move in line with COFIX (Cost of Funds Index) and the 5-year financial bond interest rate. As of the 16th of last month, the variable mortgage loan interest rates at these banks ranged from 2.49% to 4.03% annually. In contrast, mixed mortgage loan rates ranged from 2.89% to 4.48%, with both the upper and lower bounds more than 0.4 percentage points higher than variable mortgage loan rates. In other words, to benefit from principal and interest reduction by choosing the interest rate cap mortgage loan, the interest rate must rise at least above the special contract rate, which currently makes subscription unnecessary.

A bank official explained, "Since conditions vary by bank, the gap between mixed and variable mortgage loan rates can be close to 1 percentage point. It is difficult to recommend the interest rate cap mortgage loan to borrowers because it includes an additional margin rate."

Another official said, "As far as I know, no borrowers have inquired about the interest rate cap mortgage loan at sales counters yet. With variable mortgage loan rates based on COFIX remaining stable, there are unlikely to be customers willing to switch to the interest rate cap mortgage loan and pay more interest."

For these reasons, variable mortgage loans accounted for 81.5% of new household loans at banks at the end of June, marking the highest level in 7 years and 5 months since January 2014 (85.5%).

A financial authority official emphasized, "We will decide whether to extend the system based on operational performance over the next year. We will continue to improve measures to address the increasing household burden due to rising interest rates."

The financial authorities plan to introduce a 'Preferential Program for Low-Income Households' to the Bogeumjari Loan in September, allowing low-income borrowers to refinance into fixed-rate policy mortgages until maturity. They also plan to operate ultra-long-term policy mortgages (40 years) with fixed rates until maturity and continue reviewing expansion into the private sector.

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