Will 'Interest Rate Cap Loan Products' Emerge Amid Rising Interest Rate Trends?

Financial Authorities Revise Products... Review Activation Measures

[Asia Economy Reporter Kwangho Lee] As interest burdens increase due to rising loan interest rates, 'interest rate cap loan products' are gaining attention.

On the 17th, according to the financial sector, financial authorities are considering measures to activate loan products with interest rate caps amid concerns over rising loan interest rates.

This product was introduced by 15 banks under the leadership of financial authorities in March 2019 but showed poor execution results. The interest rate cap type mortgage loans launched at that time limited the maximum interest rate increase to 1 percentage point per year and within 2 percentage points over the next five years. It was structured by adding special agreements to existing loans, so maturities varied, and refinancing was possible after the fifth year.

However, due to the impact of COVID-19 last year, the Bank of Korea lowered the base interest rate to a record low of 0.5% per annum, so there was little reason to worry about the risk of interest rate hikes.

Now the situation has changed. As domestic and international interest rates rise recently, concerns are being raised in various quarters. An industry insider said, "With the outlook for loan interest rate increases prevailing, even COFIX (Cost of Funds Index), which is the benchmark for variable-rate mortgage loans, has turned upward after four months, so the interest burden on real demand borrowers is expected to increase," adding, "It is time for financial authorities to take an active stance."

In fact, from the 16th, commercial banks raised variable-rate mortgage loan interest rates by 0.01 percentage points. KB Kookmin Bank raised rates to 2.4?3.9%, Woori Bank to 2.63?3.63%, and NH Nonghyup Bank to 2.42?3.63%.

Yoon Seok-heon, Governor of the Financial Supervisory Service, recently mentioned the need to encourage the launch of various loan products to mitigate the risk of rising interest rates. Financial authorities are reviewing plans to reorganize and activate interest rate reduction products. A financial authority official said, "In preparation for the risk of interest rate hikes, we are currently assessing the sales status of products and preparing measures to organize products to create an environment where consumers can make choices."