Shinhyeop and Nonghyup Launch Interest Rate Cap Special Agreement for Mortgage Loans... Limited Within 2%p for 3 Years

Mutual Finance Sector to Offer Interest Rate Cap Special Agreement on Mortgage Loans Starting the 10th
Interest Rate Increase Limited to 2.00~2.5%p Over 3 Years
Subscription Fee Adds 0.2%p to Loan Interest Rate

[Asia Economy Reporter Song Hwajeong] # Mr. A, who borrowed a 300 million KRW mortgage loan from Cooperative B with a variable interest rate on a lump-sum maturity repayment basis, is currently subject to an interest rate of 4.00% (interest rate renewal cycle of 6 months). Ahead of the interest rate renewal, he visited Cooperative B. The staff explained that if the loan interest rate rises significantly in the future, he could consider subscribing to a capped interest rate mortgage loan special contract, which limits the interest rate increase (0.75 percentage points per year, 2.00 percentage points over 3 years) in exchange for a small additional premium (0.20 percentage points) on the interest rate. If Mr. A subscribes to the capped interest rate mortgage loan special contract and the interest rate continues to rise by 2.50 percentage points over 3 years, it is expected that he will save about 1.95 million KRW in interest costs over 3 years compared to not subscribing.

According to the Financial Supervisory Service on the 6th, mutual finance institutions have voluntarily prepared a capped interest rate mortgage loan special contract that limits the interest rate increase for a certain period to reduce the interest burden on borrowers with variable interest rate loans, and will start handling it from the 10th.

The subscription target is household borrowers currently using or newly using variable interest rate mortgage loans. They can subscribe by adding the special contract at the cooperative where they currently use or intend to receive a variable interest rate mortgage loan. There is no separate screening, and subscription and early termination are possible only once. The limit on the interest rate increase is 0.75 to 0.90 percentage points per year (three intervals of one year each over 3 years), and 2.00 to 2.5 percentage points over 3 years. The subscription cost adds 0.2 percentage points to the loan interest rate.

However, when subscribing to the special contract, it is necessary to carefully decide whether to subscribe by comprehensively considering the expected future loan interest rate increase and its duration, as well as the premium level. If the future loan interest rate increase is not significant, there is a possibility of only bearing the subscription cost (premium) without receiving the benefit of the interest rate cap. Even if the interest rate increase is large in the future but temporarily rises and then falls, the benefit of the interest rate cap may be less than the subscription cost (0.20 percentage points) that must be borne during the subscription period.

When using loans with a long interest rate renewal cycle, note that if you subscribe at a point when a considerable period remains before the renewal cycle, the interest rate cap benefit will be applied after the next interest rate renewal cycle arrives. For borrowers using loans with a 6-month interest rate change cycle, if they subscribe when 5 months remain until the next interest rate change cycle, they will pay only the premium for 5 months, and the interest rate cap will start to apply from the next interest rate renewal time. Therefore, it is advantageous to subscribe near the time when the next interest rate renewal cycle approaches so that the interest rate cap can be applied immediately after subscription.

Note that if the interest rate cap is reset higher after 1 and 2 years of subscription, the possibility of benefiting from the interest rate cap afterward may decrease. Customers should check with the cooperative where they subscribed about the next interest rate cap when the reset cycle arrives, and if they judge that the application of the next interest rate cap is unlikely, they should consider early termination.

A Financial Supervisory Service official said, "Household borrowers using variable interest rate mortgage loans at mutual finance institutions can apply for an interest rate cap agreement that limits the maximum future loan interest rate increase in exchange for bearing some additional interest as a premium, even if market interest rates surge," adding, "Since there may be some differences by industry regarding the handling cooperative and the method of applying the interest rate cap, inquiries should be made to each central association or individual cooperative."

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