Financial Authorities Urge Banks to Develop Incentives for Increased Sales of Fixed-Rate Mortgage Loans

'Banking Sector Management and Business Practice Improvement Measures' Task Force (TF)
Minimizing Interest Rate Fluctuations to Reduce Financial Consumer Burden

Archive photo / Photo by Mun Ho-nam munonam@

The interest rate system of commercial banks will be improved to promote the sale of loan products with low interest rate fluctuations, such as fixed-rate mortgage loans (hereinafter referred to as mortgage loans). This is to mitigate the risk to financial consumers caused by interest rate fluctuations.

The task force (TF) on 'Improvement Measures for Banking Sector Management and Business Practices,' organized by financial authorities, announced on the 5th that it has created incentives for banks to supply their own fixed-rate mortgage loans.

The authorities will manage the target proportion of long-term and fixed-rate loans by banks. If banks excessively handle variable-rate loans, penalties will be imposed. This includes additional contributions to the Korea Housing Finance Credit Guarantee Fund and increased deposit insurance premiums.

Measures will also be introduced to ease prepayment penalties when financial consumers switch from variable-rate to fixed-rate loans. The supply of fixed-rate products will be increased through the Korea Housing Finance Corporation.

A customer is receiving consultation at the bank loan consultation desk. Photo by Jinhyung Kang aymsdream@

Kim So-young, Vice Chairman of the Financial Services Commission, said, "The high proportion of variable-rate loans among mortgage loans increases borrowers' burdens when interest rates rise." Currently, the composition of mortgage loans is 56.0% variable-rate, 20.9% hybrid (fixed for 5 years then variable), and 2.5% pure fixed-rate.

Due to a lack of funding base for handling long-term fixed-rate mortgage loans, the proportion of fixed-rate loans in Korea is low compared to major overseas countries. The fixed-rate proportions are 85% in the United States, 97% in France, and 90% in Germany. Accordingly, financial authorities stated that they will utilize mortgage-backed securities (MBS) and covered bonds issued by the Korea Housing Finance Corporation, which are long-term funding instruments, for funding.

Credit loans will also be expanded to products with low interest rate volatility. The handling of credit loan products linked to COFIX (Cost of Funds Index), which has low interest rate volatility, will be increased. Vice Chairman Kim pointed out, "Currently, 86% of bank credit loans are linked to highly volatile funding sources such as bank bonds, and as a result, the risk is passed on to borrowers during periods of rising interest rates."

Accordingly, banks plan to develop and launch credit loan products linked to the newly outstanding balance COFIX, which has the lowest volatility among COFIX indices, in the second half of the year. Suhyup Bank, Jeonbuk Bank, Gyeongnam Bank, and Hana Bank are already selling such products.

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