Home Buyers Mostly Choose 'Fixed-Rate Mortgage Loans'

Market Banks' Fixed Interest Rates More Than 1%P Lower Than Variable Rates

Increasing Choice of Fixed-Rate Mortgage Loans Unchanged for 5 Years

Borrowers Say "Lower Fixed Rates Are a Blessing in Disguise"

[Asia Economy Reporter Shim Nayoung] Kwon Ji-eun (34), who lives in Hyehwa-dong, Jongno-gu, Seoul, went to a bank counter to consult about purchasing a newlywed apartment and chose a fixed interest rate without hesitation. "I was worried because interest rates have been rising so much lately, but fortunately, the fixed interest rate was more than 1 percentage point lower than the variable rate, so I felt relieved," she said. "Since interest rates are expected to rise until the first half of next year, I decided to go with the fixed rate for now."

The rates Kwon was offered were 5.9% for variable and 4.8% for fixed. In terms of monthly repayments, that amounts to 2.37 million KRW and 2.09 million KRW respectively, a difference of nearly 300,000 KRW. Kwon said, "If the loan period exceeds three years, there is no early repayment penalty, so I plan to repay with the fixed rate for three years, then if rates drop, I will compare again with the variable rate and switch to the lower one."

Fixed mortgage rates can be up to 1.7 percentage points lower than variable rates

Since last month, fixed mortgage rates at commercial banks (fixed for five years then switching to variable) have fallen below variable rates, leading to an increasing number of borrowers choosing fixed rates. On the 19th, the mortgage rates at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NongHyup) ranged from 4.59% to 6.66% for fixed rates and 5.17% to 7.72% for variable rates. Some banks had fixed rates more than 1.7 percentage points lower than variable rates.

According to officials from commercial banks, "Among new mortgage borrowers recently, 8 to 9 out of 10 choose fixed rates. Fixed rates are not only lower than variable rates but also eliminate concerns about further rate hikes for the time being. Until October, variable rates were lower than fixed rates, so even during rate hikes, customers tended to choose variable rates, but the atmosphere has clearly changed."

[Image source=Yonhap News]

Why have fixed mortgage rates dropped below variable rates?

So, why has the unusual situation occurred where fixed mortgage rates are lower than variable rates? Usually, fixed rates are set higher than variable rates by banks to reduce risk losses. Moreover, the benchmark for fixed rates, bank bond yields, had surged (AAA-rated 5-year bank bonds: 2.34% on January 3 → 5.47% on October 21), causing fixed rates to be higher than variable rates.

However, due to recession concerns, the yield curve inverted (long-term yields fell below short-term yields), and financial authorities reduced bank bond issuance as a market stabilization measure, changing the situation. The AAA-rated 5-year bank bond yield fell (from 5.47% on October 21 to 4.52% on December 16), causing fixed rates to start dropping.

On the other hand, variable rates are based on COFIX (Cost of Funds Index), which hit a record high on the 16th (4.34% based on November new loan amounts) and have been jumping monthly. COFIX is the weighted average interest rate of funds raised by eight domestic banks, reflecting changes in interest rates of deposit products such as savings, time deposits, and bank bonds. When COFIX falls, banks can secure funds at lower interest costs; when it rises, the opposite occurs. During the rate hike cycle, deposit rates rose, pushing COFIX and variable mortgage rates higher. If this trend continues, variable rates are widely expected to exceed 8% early next year.

According to the Bank of Korea Economic Statistics System, as of October, fixed-rate loans accounted for 29% of household loans at domestic deposit banks, while variable-rate loans accounted for 71%. This shows an increase in fixed-rate borrowers compared to September (fixed 17.5%, variable 82.5%). A commercial bank official predicted, "Due to expectations that the Bank of Korea will continue to raise rates once or twice more, the proportion of fixed-rate loans is expected to increase for the time being."

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