[Real Estate Finance] Interest Rates Rising but Limits Shrinking... How Should You Handle Loans?

If You Plan a Mortgage, Reduce Credit Loans
How to Use Deposit-Backed Loans for Idle Funds
Now Is the Time to Consider Fixed (Mixed) Loan Products
Loan Consultation: "Get It Early and from Multiple Places"

[Asia Economy Reporter Sunmi Park]Kang Ji-young (alias, 39), who has a bank loan of 13.6 million KRW (deposit-secured loan), is currently receiving an interest rate of 2.36% per annum. She already applied for a one-year loan maturity extension at the end of last month, allowing her to use the funds until November 24 next year. Although the loan interest rate has increased by 0.45 percentage points from 1.91% applied a year ago, considering that the current market bank credit loan interest rates range from 3.35% to 4.68% per annum, her loan conditions are quite favorable.

Following the Bank of Korea’s 0.25 percentage point base rate hike in August, an additional increase is expected on the 25th of this month. Further rises in loan interest rates are inevitable, and with the financial authorities’ household loan volume regulations also reducing loan limits, borrowers face increased uncertainty in funding. As banks reduce available loan limits and increase interest burdens, borrowing money well now requires strategy and methods.

If You Plan to Take Out a Mortgage Loan, Reduce Unnecessary Credit Loans

If you are looking for a loan product like an overdraft account that you can draw on in emergencies and repay when not needed, it is recommended to utilize dormant deposit products.

This means using deposit-secured loans such as the Housing Subscription Savings Account, which allows borrowing 90-95% of the saved amount. You can get a loan secured by the principal without closing the account, and the subscription function remains intact. Considering that the credit loan interest rates at the four major commercial banks have surged to 3.35-4.68% per annum recently, the deposit-secured loan interest rate, which still maintains a level in the 2% range, is quite attractive. Moreover, although deposit-secured loans are included in the Debt Service Ratio (DSR) calculation, only the interest on the loan is counted in the DSR, so the burden is relatively low.

If you need to use a mortgage loan (jumdae) after January next year when the second phase of DSR is applied, you must plan your strategy well to receive the maximum loan limit. According to the household loan management strengthening plan announced by the Financial Supervisory Service last month, from January next year, DSR 40% regulation will apply to new loans exceeding a total loan amount of 200 million KRW. From July next year, the regulation will apply even if the total loan amount exceeds 100 million KRW.

If you plan to take out a mortgage loan, it is advantageous to reduce existing overdraft accounts as much as possible. Also, if you have created an overdraft account but are not using it, reducing the limit as much as possible will help increase your future mortgage loan limit. The total loan amount used in DSR calculation is based on the sum of all household debts, and for overdraft accounts, the limit amount, not the actual used amount, is reflected.

It is also better to reduce unnecessary credit loans as much as possible. When calculating DSR, the maturity for credit loans is generally set at 5 years, while for mortgage loans it is six times longer at 30 years. Therefore, for the same loan amount, the annual principal and interest repayment for mortgage loans is lower than for credit loans, resulting in a lower DSR (which means a higher loan limit). The DSR repayment ratio for a 100 million KRW credit loan is equivalent to that of a 600 million KRW mortgage loan, so from a DSR perspective, it is much more advantageous to take out a mortgage loan than a credit loan.

If You Are Worried About Interest Rate Increases, Target Fixed (or Mixed) Rate Products

If you are concerned about ongoing interest rate hikes, it is better to choose fixed-rate or mixed-rate mortgage loan products rather than variable-rate ones when deciding on a mortgage loan.

Of course, the variable mortgage loan interest rates at the four major commercial banks currently range from 3.31% to 4.81% per annum, which is lower than the fixed rates of 3.97% to 5.37%. However, since the interest rate hike cycle has begun, choosing a variable-rate product will inevitably increase future interest burdens, so selecting a product with the longest possible fixed-rate period is the best way to reduce interest rate risk. Actively utilize early repayment fee waivers and interest rate reduction request rights applied individually by each bank, and it is advantageous to receive loan consultations from multiple banks in advance to prepare for rapidly changing loan limits and requirements in the banking sector.

Bang Young-beom, team leader at Shinhan PWM Bangbae Center, said, "It is correct to see that the interest rate hike cycle has already started," and advised, "It is time to consider switching mortgage loans to fixed rates."

He added, "If you are taking out a new mortgage loan, it is better to prepare for possible future interest rate fluctuations by choosing fixed-rate or mixed-rate products. For those who already have variable-rate loans, the three-year period for exemption from early repayment fees has passed, and for long-term loans with more than 10 years remaining, it is advantageous to monitor the interest rate situation until the end of the year and consider switching." He also noted, "Generally, many people are somewhat indifferent to interest rate changes after taking out a loan. During an interest rate hike cycle, the best way is to prepare for risks caused by interest rate fluctuations."

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