[1mm Geumyung Talk] "Variable Interest Rates Amid This Situation" Bankers Worried... The Hidden Reasons for Not Increasing Fixed Rates

During Interest Rate Hikes, Loan Rates Keep Rising but Variable Rates Remain More Popular
Slightly Higher Fixed Rates Chosen Over Variable Rates

FSS Warns of Loan Rate Risks... Urges Increase in Fixed Rate Share
5-Year Financial Bond Rates, Indicator of Fixed Rates, Soar
Banks Say "Even Lowering Spread Rates Has Limits on Fixed Rate Cuts, Consumers Don't Feel the Difference"

[Asia Economy Reporter Sim Nayoung] "I recommended fixed interest rates considering that variable rates would rise in the future, but most people are shaking their heads. From the bank's perspective, they would profit more if customers choose variable rates, but I wonder what those who are stretching their finances to buy houses are thinking."

Lee (36), who works at a branch counter of Bank A, felt concerned while processing a customer's loan on the 10th. There is a widespread prediction that the Bank of Korea will raise the base interest rate as inflation soars, and it is a financial sector formula that variable interest rates will sharply increase as a result. Nevertheless, recently, customers borrowing money are choosing variable interest rates much more often.

Variable Rates Are Lower Now but Will Increase the Burden Later

According to the 'Variable and Fixed Interest Rate Loan Proportions' announced by the Bank of Korea, as of February, variable interest rates accounted for 78% of new loans, while fixed rates were only 22%. Why are customers making this 'adverse selection'? It is because variable rates are somewhat lower than fixed rates right now. Although there are differences among banks, as of the 8th, the variable rates of the five major banks ranged from mid-3% to high-4%, while fixed rates ranged from high-3% to low-6%.

An official from a commercial bank said, "During a period of rising interest rates, banks set fixed rates higher in advance as a kind of insurance against further increases. Still, over time, the interest burden of variable rates can increase significantly, so it is necessary to have a long-term perspective."

In fact, the interest burden between the two loan types reversed within a few months. As of the end of September last year, KB Kookmin Bank's apartment mortgage loan rates were 3.03?4.65% annually for variable rates and 3.22?4.72% for fixed rates, with a difference of about 0.1?0.2 percentage points. Borrowers who took out loans with variable rates at that time now bear a higher interest burden than those with fixed rates after half a year. This is because the newly linked COFIX for variable rates rose from 1.02% in September last year to 1.70% in March this year, an increase of 0.68 percentage points.

Challenges Banks Face in Increasing Fixed-Rate Loans

As the choice of variable rates increased during the interest rate hike period, the Financial Supervisory Service issued administrative guidance to banks to increase the proportion of fixed-rate loans (from 50% to 52.5% based on mortgage loan balances), but it is uncertain how effective this will be. Asking banks to lower fixed rates to increase their share is not an easy task from the banks' perspective.

Fixed mortgage rates are linked to the daily fluctuating 5-year AAA financial bond rates. They are much more sensitive than variable rates, which are influenced by the monthly announced COFIX rates. According to the Korea Financial Investment Association, the 5-year AAA financial bond rate was 3.352% as of the 8th, marking the highest level since May 2, 2014 (3.362%).

When the benchmark rate for raising funds goes up, there is a limit to how much banks can lower interest rates. A financial sector official said, "If the base rate rises further, the financial bond rates will also increase, and even if banks reduce the spread margin to make a profit when setting fixed rates, the overall effect of lowering rates will be offset. In this case, consumers will find it hard to feel that fixed rates have actually decreased."

An official from the Financial Supervisory Service said, "Reducing the proportion of variable rates is necessary to prepare for worsening external conditions in household loans. We will provide preferential incentives on the contribution rate to the Housing Finance Credit Guarantee Fund to banks that increase the proportion of fixed-rate loans."