[Practical Finance] During Interest Rate Hikes... Switching Mortgage Loans from Variable to Fixed Rates is Advantageous

Loan Interest Rates Rising Sharply
Recommend Repaying Credit Loans Whenever Possible
If Your Credit Score Has Improved, Exercise Your Right to Request a Rate Reduction

Hana Bank loan counter.
Photo by Yonhap News

[Asia Economy Reporter Kim Jin-ho] Mr. Kim Seok-ho (40, pseudonym), who purchased a small apartment in Seoul last year, is having trouble sleeping these days despite the joy of owning his own home. He and his wife raised funds through so-called ‘Yeongkkeul’ (borrowing to the limit), but after hearing news that interest rates will be raised in earnest, he has been worried. Having utilized mortgage loans and credit loans to the fullest, Mr. Kim is now considering whether he should switch some of his loans to fixed-rate products.

Last month, the Bank of Korea abruptly raised the base interest rate by 0.25 percentage points from 0.50% to 0.75%, causing loan interest rates to fluctuate. With additional rate hikes expected within the year and financial authorities managing the total household debt volume, loan interest rates are expected to rise more steeply in the second half of the year.

Borrowers with variable interest rates are immediately growing more anxious. According to Bank of Korea statistics, the proportion of variable-rate loans among new household loans from banks reached 81.5% as of June. This means 8 out of 10 borrowers are exposed to the risk of increased interest burdens due to rising rates.

Fixed Rates Are Advantageous for Long-Term Loans

As interest burdens increase for both existing and new borrowers, experts advise that for long-term loans such as mortgage loans, it is necessary to switch from variable to fixed interest rates.

This is because fixed and variable interest rates have different characteristics. Fixed rates are determined by reflecting the market’s expected future mid- to long-term interest rate levels in advance, whereas variable rates are mainly linked to short-term interest rates. Recently, the increase in fixed rates has been relatively larger. A lending officer at Bank A said, "Assuming there are no prepayment penalties, setting mortgage loans to fixed rates is also a good option," adding, "However, it is important to carefully review the loan conditions before making a decision."

Financial authorities also recognize the need to switch large-scale mortgage loans to fixed rates and have introduced related products. A representative example is the ‘Interest Rate Rise Risk Mitigation Mortgage Loan,’ reintroduced on July 15. This product is available in two types: interest rate cap type and fixed monthly repayment type.

For the interest rate cap type, the basic structure limits the interest rate increase to within 2 percentage points over the next five years, but the annual interest rate increase limit has been lowered from 1% to 0.75%, expanding the risk mitigation range. Borrowers who previously used variable-rate loans can join by adding a special agreement to their existing loans without separate screening, paying an additional 0.15?0.2 percentage points in interest.

This helps reduce principal and interest burdens during periods of rising interest rates. For example, if someone borrowed 200 million KRW on a 30-year variable-rate loan with a current interest rate of 2.5% per annum, they would have to repay about 790,000 KRW monthly. If the interest rate rises by 2 percentage points after one year, the burden would increase significantly to about 1,000,000 KRW per month. However, if enrolled in the special agreement, the monthly burden would be reduced to about 880,000 KRW.

A financial authority official explained, "Even if interest rates rise, users can manage their debt stably over a long period, and when rates fall, they can also accelerate principal repayment."

If You Have Many Credit Loans, Start Repaying Gradually

Borrowers with many credit loans need to start repaying the principal little by little. Most credit loans are variable-rate products, and their rates are adjusted frequently, so during periods of rising interest rates, they inevitably increase sharply.

According to the Bank of Korea, as of the end of July, the average interest rate on bank credit loans was 3.89%, up 0.97 percentage points from 2.92% a year earlier. Considering that the upward trend in bank credit loan interest rates has continued recently, loan interest rates have risen nearly four times as much as the 0.25 percentage point increase in the base rate over the past year.

A banking industry official said, "Since loan interest rates are likely to continue rising until next year, it is necessary to reduce the principal little by little whenever possible to alleviate interest burdens."

The right to request a rate reduction is also a good way to reduce interest burdens. If your credit score improves or your income and assets increase positively, you can ask the financial institution to lower your loan interest rate. However, since applying does not guarantee a rate reduction, it is helpful to check the eligibility requirements for each bank.

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