[Marginalized Jeonse Tenants]③ "Fixed Interest Rates Are Cheaper?" Tenants Face Growing Dilemmas

NH Nonghyup, Shinhan, etc.: Fixed Interest Rates for Jeonse Loans < Variable Interest Rates
Interest Rate Hikes at 'Peak' VS 'Only Slowed Down'... Increasing Concerns for Prospective Borrowers
Consider Prepayment Penalties and Other Factors When Choosing

[Asia Economy Reporter Minwoo Lee] The calculations for prospective jeonse loan borrowers are becoming increasingly complicated. As fixed interest rates in some jeonse loan products have become lower than variable rates, borrowers initially consider choosing fixed rates. However, with expectations that interest rates will soon peak, they hesitate and reconsider variable rates, deepening their dilemma.

NH and Shinhan Banks’ Jeonse Loan Fixed Rates Lower Than Variable Rates

According to the financial sector on the 6th, as of the previous day, the variable interest rate range for NH Nonghyup Bank’s jeonse loan products (based on 6-month financial bonds) is 6.03?7.33%. This is up to 0.21 percentage points higher than the fixed rate range (based on 2-year financial bonds) of 5.82?7.12%. A similar phenomenon was observed at Shinhan Bank. The variable interest rate for jeonse loans (based on new COFIX, 6-month variable) ranges from 5.27% to 6.27%, while the fixed rate (based on 2-year financial bonds) ranges from 5.26% to 6.21%, which is actually higher.

Compared to the 1-year financial bond-based jeonse loan product, which adjusts rates annually and has an interest rate range of 5.65?6.65%, the gap widens further. At the upper end, the variable rate is 0.44 percentage points higher than the fixed rate product. This contrasts with the usual trend where fixed-rate products have higher interest rates to compensate for the risk of rate fluctuations. According to the Financial Supervisory Service and others, as of the end of last year, 93.5% of the jeonse loan balance (162.0119 trillion KRW) was under variable interest rates.

This phenomenon appears to stem from the tightening of the bond market following the debt default declaration related to Legoland in Gangwon Province, which caused short-term bond yields to surge. The price gap between short-term financial bonds (6-month and 1-year), which serve as the benchmark for variable rate products, and 2-year financial bonds, which benchmark fixed rate products, has narrowed.

According to the Korea Financial Investment Association, the 1-year financial bond yield rose to 5.007% on the 2nd of last month. This was the first time since the financial crisis in December 2008 that the 1-year financial bond yield exceeded 5%. On the 11th of last month, the 1-year yield was 0.075 percentage points higher than the 2-year yield. This was the first time this year that the 1-year financial bond yield surpassed the 2-year yield. Such inversion has occurred several times since. The yield gap between 6-month and 2-year financial bonds, which exceeded 1 percentage point from the beginning of the year until April, recently narrowed to 0.19 percentage points.

[Image source=Yonhap News]

Interest Rate Peak Theory Emerges... Choose Carefully

Even if fixed-rate products are similar to or lower than variable-rate products, choosing them blindly is unwise. It is essential to carefully consider the future trend of market interest rates. Recently, the theory of a 'peak in interest rates' originating from the U.S. has been gradually circulating.

On the 30th of last month (local time), Jerome Powell, Chair of the U.S. Federal Reserve (Fed), attended an event hosted by the Brookings Institution and stated, "It takes time for rapid rate hikes to impact the economy, so slowing the pace of rate increases would be reasonable," adding, "At this point, slowing the pace of rate hikes may be a good way to balance inflation and the risk of economic slowdown."

Accordingly, it has become likely that the upcoming Federal Open Market Committee (FOMC) meeting will adjust the pace from a 'giant step' to a 'big step' (a 0.50 percentage point increase in the benchmark rate).

Since the Bank of Korea cannot avoid global trends, there are expectations that it may ease its tightening stance. Bank of Korea Governor Lee Chang-yong also said in an interview with foreign media, "With the Fed signaling a slowdown in pace, we can operate monetary policy more flexibly," and "If things proceed as expected, I hope to end rate hikes around 3.5%." The current benchmark rate is 3.25%.

An official from a commercial bank said, "Since rate hikes are not completely over yet, rushing to choose fixed-rate products could be somewhat disadvantageous. However, if the jeonse loan amount is not large and a loan must be taken immediately, it is also a method to choose fixed rates after carefully considering interest costs and prepayment penalties that may occur when switching to lower-rate products later."