"Ijapoo" Surge... Variable Interest Rate Ratio Hits 8-Year High Ahead of Big Step

77.3% Variable Interest Rate Ratio as of April
Significant Increase in Interest Burden if BOK Takes Big Step

Variable Rates Currently Cheaper than Fixed Rates at Commercial Banks
But Rising Rates Will Make Variable Rates More Burdensome in Future

[Asia Economy Reporter Sim Nayoung] The proportion of variable interest rates among household loans in South Korea has reached its highest level in 8 years and 1 month. According to the Bank of Korea's Economic Statistics System on the 26th, as of April, the share of variable interest rates in the outstanding household loans of deposit banks was recorded at 77.3%, the highest since March 2014 (78.6%). If the Bank of Korea takes a big step by raising the base interest rate by 0.5 percentage points (p) at once in July, variable interest rate household loans will have to absorb the shock of the rate hike directly.

According to the Bank of Korea's 'Household Credit' statistics, as of the end of March this year, household loans totaled 1,752.7 trillion won. If the Bank of Korea raises the base interest rate by 0.5 percentage points in July and the proportion of variable interest rates at banks and other financial institutions remains the same, even if the loan interest rate rises only by the base rate, borrowers' interest burden will increase by 6.7478 trillion won (1,752.7 trillion won × 77% × 0.50%). This means that the number of 'interest poor' borrowers, whose interest burden increases significantly, could surge.

Bank of Korea Governor Lee Chang-yong said on the 21st regarding the possibility of a big step, "A big step is not decided by looking at inflation alone. We also have to consider the impact on our economy and exchange rates when inflation rises." He added, "Moreover, since South Korea has many variable interest rate bonds, we need to comprehensively consider household interest burdens and create an appropriate combination with the Monetary Policy Committee members."

The reason why borrowers' preference for variable interest rates is becoming even stronger despite the steep rise in interest rates is that variable rates are currently about 1 percentage point lower than fixed rates. As of the 24th, the mixed-type mortgage loan rates (5 years fixed rate followed by variable rate) of KB Kookmin, Shinhan, Hana, and Woori Banks range from 4.750% to 6.515% per annum, but the variable rates (new COFIX-linked) are about 1 percentage point lower, ranging from 3.690% to 5.781% per annum.

Banks also agree that for loans with maturities longer than about one year, it is necessary to choose fixed rates even if the current rates are higher. This is because, due to rapidly rising inflation and the US's giant step (a 0.75 percentage point increase in the base interest rate at once), the likelihood that the Bank of Korea will raise the base interest rate by at least 1.00 percentage point by December this year has become very high. If you have already taken out a loan with a variable interest rate, switching to a fixed rate (refinancing) is also a way to reduce future burdens.