"60,000 KRW Annual Difference in Just 10 Days"…Mortgage Loans' 'Elastic Interest Rates' [1mm Financial Talk]

Fluctuating Mixed Mortgage Loan Rates

Interest Rates Vary Like Rubber Bands Depending on Loan Execution Timing

Consumers Suffer Twice During Rising Rate Periods

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] As bond yields fluctuate during the period of rising interest rates, mortgage loan interest payments have been increasing and decreasing by tens of thousands of won annually within just a few days. Financial consumers, distressed by the rapidly rising rates, face a double burden of interest costs depending on the loan execution date. In the case of home purchase loans, the loan is usually executed on the final payment day, making it difficult to monitor interest rate trends and adjust the loan date accordingly. Consumers have no choice but to bear the risks caused by this uncertainty.

According to an analysis by a commercial bank on the 24th, when borrowing 350 million won in a mortgage loan with a mixed interest rate (fixed for 5 years, then switching to variable), the monthly interest payment fluctuated significantly within May depending on the borrowing date: 700,750 won (6th, 4.01%) → 753,668 won (9th, 4.27%) → 698,731 won (20th, 4.00%) → 731,117 won (23rd, 4.16%).

The reason the mixed mortgage interest rate changes frequently is that it is linked to the 5-year financial bond yield trend. Banks raise funds for loans through issuing bank bonds and accepting deposits. For example, mixed-rate loans are lent to consumers using funds raised by issuing 5-year financial bonds, which change daily.

This is also why mixed rates fluctuate more often than variable rates, which are influenced by the monthly announced COFIX. Although the methods differ slightly, banks calculate the mixed rate by adding a spread to the 5-year financial bond yield announced weekly on a fixed day, applying this rate to mortgage loans for the following week.

A bank official explained, "On an annual basis, depending on when the loan is taken, there can be a difference of up to 600,000 won within ten days. In May, every time the mixed rate was recalculated weekly, the 5-year financial bond yield fluctuated by 0.2 to 0.3 percentage points, causing the mixed rate to also fluctuate." The 5-year financial bond yields used as the basis for mixed rate calculation were 3.38% in the first week of May, 3.64% in the second week, 3.36% in the third week, and 3.52% in the fourth week. This volatility was greater than in April, when weekly fluctuations stayed within 0.2 percentage points.

There are criticisms that banks’ efforts to increase household loan volumes and reduce consumer burdens by consecutively lowering mortgage loan spreads have unintentionally increased consumers’ relative sense of deprivation. Woori Bank uniformly lowered the 5-year variable mortgage loan rate by 0.4 percentage points starting May 12. Shinhan Bank also reduced mortgage loan rates by 0.2 percentage points for in-branch loans and 0.1 percentage points for non-face-to-face loans starting in April. KB Kookmin Bank has extended its mortgage loan rate cuts implemented in March twice.

Mr. Ha Jungmin (37, pseudonym), who visited a bank earlier this month, said, "If the bank lowers the spread after my loan date, I will have to pay hundreds of thousands of won more in interest over five years. It’s confusing not knowing when the bank will lower the spread further."