Interest Burden Increases... Variable Rate Household Loans Account for 82.3%, Highest in 8 Years

Variable interest rates are 0.3%P lower than fixed rates as of November
Increase in demand even during interest rate hikes

[Asia Economy Reporter Kiho Sung] Amid expectations of at least two interest rate hikes this year, the proportion of variable-rate loans among new household loans has reached its highest level in over eight years. This is contrary to the usual trend during periods of rate hikes, when demand for fixed-rate loans typically increases due to interest burden. Financial authorities warn that if this situation continues, an interest payment crisis could follow, especially among 'house-poor' individuals (those who own homes but are financially strained).

According to the Bank of Korea on the 3rd, the proportion of fixed-rate loans among new household loans from deposit banks in November last year was 17.7%. This is a 3 percentage point drop from October's 20.7% in just one month. As the share of fixed-rate loans decreases, variable-rate loans are on the rise. The proportion increased from 79.3% in October to 82.3% in November, the highest since January 2014 (85.5%). The share of variable-rate loans, which was 53% in 2019 and 69.2% in 2020, has increased by nearly 20 percentage points in one year.

The reason variable-rate loans are more popular than fixed-rate loans during a rate hike period is the interest rate difference. As of November 19 last year, the variable interest rates for new COFIX-linked mortgage loans at the four major commercial banks (KB Kookmin, Shinhan, Hana, Woori) ranged from 3.440% to 5.861% per annum. Meanwhile, the mixed-type (fixed-rate) mortgage loan rates based on the 5-year bank bond rate were between 3.760% and 5.122% per annum. On average, variable rates are 0.30 percentage points lower than fixed rates.

An official from the banking sector explained, "Despite the rate hike period, more borrowers are opting for variable rates because the current rates are lower. Borrowers would only flock to fixed rates if they are confident that the fixed interest rate will rise by at least 0.3 percentage points during the loan period."

Financial authorities advise that with two to three expected base rate hikes this year (0.5% to 0.75% points), fixed rates could be more advantageous. Especially, borrowers who excessively took out loans during last year's 'Yeonggeul' (borrowing to the limit) and 'Debt Investment' (borrowing to invest) frenzy should consider the interest burden carefully.

In fact, homeowners in Seoul spent about half of their income on mortgage and other loan repayments. According to the Korea Housing Finance Corporation, Seoul's Housing Purchase Burden Index rose by 9.1 points to 182 in the third quarter of this year, marking an all-time high. The Housing Purchase Burden Index indicates the repayment burden of principal and interest when a median-income household takes out a loan to buy a median-priced home. The baseline of 100 means 25% of income is used for loan repayment. An index of 182 means that 45.5% of monthly income is spent on repaying loan principal and interest.

Another banking official said, "If interest rate hikes accelerate this year, borrowers who have borrowed from multiple financial institutions ('Yeonggeul' borrowers) and consumers who took loans from secondary financial institutions could face a significant increase in interest burden," adding, "During a rate hike period, new loans with fixed rates are more advantageous."

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