"Spread of 'Housing Price Bottom' Sentiment... Fixed or Variable? Which Interest Rate Is Advantageous?"

People Going All-In Again to Buy Homes Face Biggest Worries
Currently, Fixed Rates Are Low, Causing Concentration
But Variable Rate Loans May Increase in Future
3040 Generation Leads the Trend... Financial Authorities Warn of Rising Household Debt

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

As the belief that house prices have hit bottom spreads in the real estate market, the sentiment that "now is the cheapest time" is becoming widespread. The biggest concern for those who have taken out maximum loans (Yeongkkeul, borrowing to the limit) to buy their own homes is whether to choose fixed interest rates or variable interest rates. Currently, the more popular choice between the two is fixed interest rates. As of the 16th, the variable interest rates at the five major banks (Kookmin, Shinhan, Hana, Woori, Nonghyup) ranged from 4.08% to 6.06%, while fixed interest rates ranged from 3.83% to 5.92%. Fixed interest rates are slightly lower.

Shift Toward Lower Fixed Rates

On the 20th, a representative from a commercial bank said, "Since mortgage loans are worth hundreds of millions of won, even a 0.1 percentage point difference in interest rates causes a shift to one side," adding, "Because fixed interest rates are lower than variable rates, about 60-70% of new mortgage loans issued by banks these days are at fixed rates." Between July and August, the proportion of fixed-rate new mortgage loans at Kookmin Bank, Shinhan Bank, and Hana Bank was about 60-70%. According to the Bank of Korea's Economic Statistics System, as of June, 73% of new mortgage loans issued by domestic banks were fixed-rate, while 27% were variable-rate.

One reason fixed interest rates are lower is that they adjust faster than variable rates. A bank official explained, "Fixed rates reflect daily changes in bank bond yields, while variable rates reflect the COFIX, which is updated monthly, so fixed rates move ahead of variable rates." When bank interest rates peaked in December last year and then declined between January and April this year, fixed rates fell faster than variable rates.

Financial authorities also played a role in lowering fixed rates to some extent. During the rapid interest rate hikes in the second half of last year, they recognized the problem of sharply increased interest burdens on those who took out mortgage loans with variable rates and urged banks to increase the proportion of fixed-rate loans. Commercial banks also deliberately lowered fixed rates by reducing the additional interest margin.

View of Yeouido Sambu Apartment from the 63 Building Observatory. Photo by Hyunmin Kim kimhyun81@

Clear Upward Trend in Fixed Rates... Variable Rates May Drop Further

It is uncertain whether fixed interest rates will continue to remain lower than variable rates in the future. This is because the 5-year bank bond yield, which underpins fixed rates, is rising. As of the 17th, it stood at 4.41%, up 0.45 percentage points from early May (3.96%). A financial sector official explained, "The recent rise in U.S. Treasury yields is pushing up domestic bond yields, and if this upward trend continues, fixed mortgage rates will inevitably rise as well."

Among the five major banks, Shinhan Bank is the only one where, as of the 17th, variable rates (4.28% to 5.59%) were lower than fixed rates (4.61% to 5.92%). On the same day, variable rates at Woori Bank and Nonghyup Bank fell by 0.1 percentage points, reflecting a 0.01 percentage point drop in COFIX the previous day. The Bank of Korea is widely expected to keep the base interest rate unchanged at the monetary policy meeting scheduled for the 24th. If the relative levels of fixed and variable rates reverse, the share of variable rate choices could increase at any time.

View of the Noryangjin redevelopment site in Seoul from the 63 Building observatory. Photo by Hyunmin Kim kimhyun81@

3040 Generation Leads Yeongkkeul Borrowing

As the perception that house prices have bottomed out spreads and the government eased real estate regulations earlier this year, the 3040 generation (people in their 30s and 40s) is leading the buying trend. According to the Court Registry Information Plaza, from January to June this year, the number of first-time buyers registering transfers of collective buildings (apartments, officetels, row houses, multi-family houses, etc.) nationwide in their 30s and 40s was 198,810. This accounts for 47.7% of all applicants (416,877), nearly half.

The government has relaxed the loan-to-value (LTV) ratio cap to 80% for first-time homebuyers since the second half of last year, regardless of region, house price, or income. The loan limit was also increased from 400 million won to 600 million won. For first-time buyers purchasing homes priced below 1.2 billion won, acquisition tax was exempted up to 2 million won without income criteria.

With these major regulatory relaxations, home buying sentiment has recovered, and Seoul apartment buying sentiment has risen for 22 consecutive weeks. According to the Korea Real Estate Board, the Seoul apartment sales supply-demand index for the fifth week of July (as of the 31st) was 88.3, continuing to rise since the fourth week of February (66.3). A figure below the baseline (100) indicates that there are more sellers than buyers in the market.

Financial Authorities Warn of Household Debt Growth

Meanwhile, the Financial Supervisory Service (FSS) has issued a warning about the rapidly increasing household loans. On the 17th, Lee Joon-su, Deputy Governor of the FSS, held a meeting with bank CEOs and urged, "Please strengthen management to prevent a rapid expansion of household loans." Household loans in the banking sector began to increase from April, with the growth rate accelerating over time. In July, loans increased by 5.4 trillion won compared to the previous month.

The financial authorities stated they will monitor to ensure that the Debt Service Ratio (DSR) regulations are properly enforced. They pointed out that 50-year mortgage loans, which have lower monthly principal and interest payments than 30-year mortgages, are being used by financial consumers as a means to evade DSR regulations.

Deputy Governor Lee said, "We will check whether the credit screening process, including income assessment and collateral valuation, is being properly conducted," and added, "Please manage so that the overall household loan growth and the loan growth rate of specific borrower groups remain within the scope consistent with the bank's credit policy, risk management, and capital management plans." The FSS plans to conduct a comprehensive inspection of household loan handling practices in the banking sector by October.

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