"Interest Rate Hike Cycle Continues"... Fixed-Rate Loans Gain Popularity

Even with a Monetary Policy Pause in Q2, the Interest Rate Hike Cycle Will Continue in the Second Half of the Year

[Asia Economy Reporter Park Sun-mi] As expectations grow that the Bank of Korea's interest rate hike cycle will continue, signs of change are emerging in the proportion of variable-rate loans within the banking sector.

On the 15th, the financial sector predominantly forecasted that monetary policy normalization would continue in the second half amid an economic expansion phase. Ye-in Kim, a researcher at Korea Investment & Securities, stated, "Although a pause in monetary policy in the second quarter is inevitable due to the March presidential election and the retirement of Bank of Korea Governor Lee Ju-yeol, the interest rate hike cycle will continue in the second half," adding, "This is because interest rate hike cycles tend to persist during economic expansion phases when economic recovery and inflationary pressures occur."

The Bank of Korea raised the base interest rate by 25 basis points yesterday as expected by the market. With three rate hikes since the second half of last year, the base rate has now returned to the pre-COVID-19 level of 1.25%.

With additional base rate hikes anticipated in the second half, many borrowers are increasingly choosing fixed (mixed) interest rates over variable rates when taking out new loans.

A representative from a commercial bank said, "Last year, most loan customers preferred variable-rate products, but now 80-90% are seeking fixed-rate products, showing a complete shift in sentiment." Another bank official added, "Some customers consult with staff about whether fixed or variable rates are more advantageous when taking out new mortgage loans, and recently, as the interest rate hike trend has become more pronounced, many have decided outright to proceed with fixed-rate products."

According to the banking sector, the fixed-rate new mortgage loan products at Kookmin, Shinhan, Hana, and Woori Banks are priced at approximately 4.01?5.21%, 3.78?4.59%, 3.83?5.13%, and 4.14?5.54%, respectively. Shinhan Bank offers the lowest rates at both the upper and lower ends among the four major banks. In Shinhan Bank's case, the variable-rate mortgage loan interest rates range from 3.64% to 4.69%, with the upper limit exceeding that of fixed rates, creating a 'reversal phenomenon' that has significantly increased customer preference for fixed-rate products.

Until last year, 8 out of 10 new borrowers chose variable-rate products, which generally had lower interest rates, but the outlook that the Bank of Korea will continue raising the base rate due to inflation has completely changed the atmosphere. According to the Bank of Korea, as of the end of November last year, 82.3% of new household loans followed variable interest rates.

The industry expects banks to promote fixed-rate products over variable-rate ones to manage increased interest burdens and maintain soundness amid rising loan interest rates.

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