"Should I Refinance My Loan?"... 'Yeongkkeuljok' Face Growing Concerns Amid Rising Interest Rates

Before the Full-Scale Interest Rate Hike, Switching Mortgage Loans to 'Fixed Interest Rates' Is Necessary
Credit Loans Sensitive to Interest Rates Should Gradually Repay Principal

[Asia Economy Reporter Kim Jin-ho] Kim Jong-myeong (41, pseudonym), who succeeded in buying a house last year through so-called 'Youngkkeul (borrowing to the limit of one's soul)' loans, has been losing sleep lately. This is because he came across news that loan interest rates would rise significantly following the Bank of Korea's base rate hike decision last month. Since both his mortgage and credit loans are variable-rate products, Kim is deeply concerned about the timing of refinancing his loans.

According to the financial sector on the 22nd, after the Bank of Korea abruptly raised the base rate by 0.25 percentage points from 0.50% to 0.75% last month, loan interest rates have been fluctuating. With an additional base rate hike expected as early as November and the financial authorities strengthening household debt management, a steeper rise in loan interest rates is inevitable from the second half of the year.

Accordingly, borrowers like Kim with variable-rate loans are facing increasing worries. According to Bank of Korea statistics, about 82% of new household loans from banks are variable-rate loans. It is expected that 8 out of 10 people will face a greater interest burden during this period of rising rates.

As interest burdens increase not only for existing borrowers but also for new ones, experts advise that for long-term loans such as mortgages, switching from variable to fixed interest rates is necessary. A credit officer at a commercial bank said, "After checking the remaining loan period and various costs, if switching to a fixed rate results in greater interest savings, refinancing is a good option."

This is because fixed and variable interest rates have different characteristics. Fixed rates are determined by reflecting the market's expectations of future mid- to long-term interest rate levels in advance, whereas variable rates are mainly linked to short-term interest rates. The recent magnitude of rate hikes inevitably results in fixed rates being relatively higher.

Attention should be paid to the ‘Interest Rate Rise Risk Mitigation Mortgage Loan’ reintroduced on July 15. For the capped interest rate type of this product, the interest rate increase is limited to within 2 percentage points over the next five years. In particular, borrowers who previously had variable-rate loans can join by adding a special clause to their existing loans without separate screening, with an additional 0.15 to 0.2 percentage points added to the annual interest rate.

Borrowers with large credit loans or overdraft loans should try to repay the principal little by little. Most credit loans are variable-rate products with interest rates adjusted frequently, and they tend to rise sharply during periods of rate hikes. According to the Bank of Korea, as of the end of July, the average bank credit loan interest rate was 3.89%, up 0.97 percentage points from 2.92% a year earlier.

Meanwhile, to reduce interest burdens during this period of rising rates, it is necessary to actively use the right to request an interest rate reduction. If your credit score improves or there are positive changes such as increased income or assets, you can ask financial institutions to lower your loan interest rate.

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