"I Won't Choose Variable Interest Rates Anymore"... Becoming More Expensive Than Fixed Rates, Causing Losses

Recent Variable Interest Rates Surpass Fixed Rates
Authorities Urge "Increase Fixed Rate Proportion," Leading Commercial Banks to Adjust Rates

Long-Term Market Rates Lowered by Economic Recession Impact
As BOK Raises Rates, Variable Rate Borrowers Suffer More Losses

On the 7th, a scene at a bank counter in downtown Seoul shows the ongoing trend among major commercial banks to lower loan interest rates while raising interest rates on regular savings and installment savings products. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Sim Nayoung] The number of people taking out new mortgage loans with variable interest rates, which are directly affected by interest rate hikes, is expected to significantly decrease in the future. Until now, variable interest rates were lower than fixed rates, so borrowers tended to choose variable rates even during periods of rising interest rates.

Although borrowers chose variable rates because the immediate interest burden was lower, financial authorities were concerned that during periods of rising interest rates, the interest burden would sharply increase every six months when the rate adjusts. However, recently, fixed interest rates have become lower than variable rates, and the proportion of fixed-rate loans is expected to increase going forward. This occurred as banks artificially adjusted their rates and long-term market interest rates fell due to concerns about an economic recession. Currently, banks’ fixed-rate loans are hybrid types, with fixed rates applied for five years before switching to variable rates.

Shinhan and Hana Banks: Fixed Rates Lower Than Variable Rates

◆ Shinhan and Hana: Fixed Rates Lower Than Variable Rates = According to industry sources on the 18th, Shinhan Bank’s mortgage fixed interest rates (as of the 18th) ranged from 4.21% to 5.04%, which was lower than the variable rates of 4.31% to 5.36%. Hana Bank also had fixed rates (4.79% to 6.09%) cheaper than variable rates (4.92% to 6.22%) on the same day. Kookmin Bank, Woori Bank, and NH Nonghyup Bank are also likely to see reversals soon. Although fixed rates are still higher than variable rates, the gap is only about 0.5 to 0.8 percentage points (p). Just a month ago, fixed rates were more than 1%p higher than variable rates at each bank, so the situation has clearly changed compared to then.

The reasons are twofold: banks’ rate adjustments and changes in market interest rates. After the Financial Supervisory Service pressured banks to increase the proportion of fixed rates, Kookmin Bank (in April) and Woori Bank (in May) lowered fixed rates by 0.4%p each. In July, Nonghyup Bank (0.1%p decrease for both fixed and variable rates) and Shinhan Bank (0.15%p decrease for fixed, 0.35%p decrease for variable) also cut their rates. A representative from a commercial bank explained, "After the Financial Supervisory Service ordered an expansion of fixed rates, banks internally lowered the spread on fixed rates and increased preferential rates. As a result, the gap between fixed and variable rates narrowed or reversed."

Due to concerns about an economic recession, the 5-year AAA-rated bank bond yield fell, which also caused fixed rates to drop somewhat. The 5-year yield is the benchmark for calculating fixed rates and currently stands at 3.673% (as of the 14th), down about 0.5%p from the highest point this year on the 17th of last month (4.147%). Another commercial bank official said, "As the central bank aggressively responded to inflation shocks with rate hikes, concerns about triggering a recession emerged, causing long-term market interest rates to fall. Compared to variable rates based on the rising COFIX, which is based on deposit rates, fixed rates reflecting the falling long-term market rates will be lower."

[Image source=Yonhap News]

The Higher the Base Rate, the Greater the Interest Burden on Variable Rates

According to the Bank of Korea, as of May, the proportion of variable-rate loans among new loans was 82.8%, much higher than the 17.4% for fixed-rate loans. However, the industry predicts that this trend will gradually reverse starting this month.

A commercial bank simulated a mortgage loan of 420 million KRW on July 4th, applying a variable rate of 4.29% and a fixed rate of 4.25%. The results showed that fixed-rate borrowers would pay a monthly principal and interest of 2,066,148 KRW, while variable-rate borrowers would pay 2,075,995 KRW. Furthermore, assuming the Bank of Korea raises the base rate by 0.75%p by January next year when the new variable rate applies, the situation for variable-rate borrowers worsens. The variable rate would rise to 5.04%, increasing the monthly principal and interest to 2,262,536 KRW, about 190,000 KRW more per month than fixed-rate borrowers.

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