[Interest Rate Hike] Loan Interest Rates 'Accelerate'... Which Bank Offers the Lowest Fixed Rate?

Base Interest Rate Raised Again from 1.00% to 1.25%
Shift from Variable to Fixed (Hybrid) Interest Rate
Clear Change in Atmosphere When Choosing Loan Products

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi]"Until last year, most loan customers preferred variable interest rate products, but now 80-90% are looking for fixed (or mixed) interest rate products, showing a complete change in the atmosphere." - A bank teller at Ilsan branch

As the Bank of Korea (BOK) raised the base interest rate starting in January as announced, more people at bank loan counters are seeking fixed-rate products rather than variable-rate products, which are more affected by the base rate hike. The BOK Monetary Policy Committee raised the base rate by 0.25 percentage points from 1.00% to 1.25% at its policy meeting on the 14th.

According to the banking sector, the fixed-rate new mortgage loan interest rates at Kookmin, Shinhan, Hana, and Woori Banks range from 4.01% to 5.21%, 3.78% to 4.59%, 3.83% to 5.13%, and 4.14% to 5.54%, respectively. Shinhan Bank offers the lowest rates at both the upper and lower ends among the four major banks. In Shinhan Bank’s case, the variable mortgage loan interest rate ranges from 3.64% to 4.69%, with the upper limit even higher than the fixed rate, creating a 'reversal phenomenon' that has led to a noticeable increase in customers preferring fixed-rate products.

A Shinhan Bank official said, "Some customers consult with staff about whether fixed or variable rates are more advantageous when taking out new mortgages, and recently, as the interest rate hike trend has become more pronounced, many have decided to proceed with fixed-rate products right away."

Until last year, 8 out of 10 new borrowers chose variable-rate products due to their lower rates, but with inflation and expectations that the BOK will continue raising the base rate, the atmosphere has completely changed.

According to the Bank of Korea, as of the end of November last year, 82.3% of new household loans followed variable interest rates. The share of variable rates was only 53.0% on average in 2019 before the COVID-19 pandemic but jumped to around 63.8% in the early low-interest-rate environment of 2020 and surged to over 80% last year.

This shift in atmosphere was also partly due to the narrowing gap between fixed and variable loan interest rates recently, which increased the attractiveness of fixed-rate products.

With the base rate hike trend from the beginning of the year, the proportion of variable-rate loans in the banking sector is likely to have peaked and may decline. Last year, the variable interest rate shares for won-denominated loans at the four major banks were Shinhan 78%, Hana 75%, Woori 69%, and Kookmin 46%. Industry insiders expect banks to promote fixed-rate products more than variable-rate ones to manage increased interest burdens and maintain soundness amid rising loan interest rates.