[Loan? Refinancing!] ① "Reduced Monthly Repayment by 1 Million Won"... Rapid Growth of Debt Consolidation Loans

Mortgage Loans Prefer Low-Interest Internet Banks
Switch Personal Loans via Loan Comparison Platforms
Demand for Refinancing Loans to Surge from Second Half of This Year

[Image source=Yonhap News]

[Asia Economy Reporters Sim Nayoung, Yoo Jehun, Boo Aeri] In January 2021, office worker Moon Hangyeol (42) took out a mortgage loan of 650 million KRW at an annual interest rate of 2.5%, choosing a variable interest rate that changes once a year at a foreign bank. After much consideration, last month he switched to an internet bank mortgage loan. [Related Article] 'Loan? Switch!'

Moon said, "When I bought the house, I looked for the cheapest interest rate and took out a loan, but it was a product where the variable interest rate was determined based on financial bonds." He added, "Recently, since interest rates have risen so much, I inquired at the bank and found out that the renewal rate in January next year would likely exceed 7%, so I started looking into refinancing loans."

Moon chose Kakao Bank's variable interest rate mortgage loan product at 4.05%. He said, "If I had kept the loan as it was, the monthly principal and interest repayment would have exceeded 4 million KRW, but after switching, it dropped to about 3 million KRW." He added, "Saving about 1 million KRW per month makes all the effort worthwhile."

Borrowers with 'All-in' Strategy Reconsider Their Loans

During the period of rising interest rates, more borrowers with an 'all-in' strategy are reviewing their existing loans. The phenomenon of moving to banks offering even 0.1 percentage points lower interest rates has become clear since the second half of this year. After the Bank of Korea implemented big steps (0.5 percentage point hikes in the base rate) in July and September, the sharp increase in interest rates has led to a rise in refinancing demand.

According to Kakao Bank (hereafter Kakao Bank) on the 27th, the amount of mortgage loans refinanced from other banks to Kakao Bank reached 95.3 billion KRW as of the end of October. This increased from 6.3 billion KRW at the end of March, to 9.4 billion KRW at the end of June, and 64.3 billion KRW at the end of September. A Kakao Bank official stated, "About 80% of refinancing demand comes from borrowers moving from first-tier banks to Kakao Bank," and "As of the end of October, 3 out of 10 people receiving mortgage loans from Kakao Bank are for the purpose of refinancing from other banks."

Kakao Bank's mortgage loan interest rates are currently in the mid-4% range as of the 26th. This is lower than commercial banks, which start from 5-6% even at their lowest. Until last month, loans with interest rates in the 3% range were also available. According to the November mortgage loan interest rate segment share (installment repayment method) published by the Bankers Association, the share of loans with interest rates between 3.5% and under 4% reached 16.3%. An internet bank official explained, "Since operations are non-face-to-face, there are no recruitment commission costs or brokerage partnership fees, Kakao Bank and K Bank tend to offer lower mortgage loan interest rates."

Rapid Increase in Demand for Refinancing from Secondary to Primary Financial Institutions for Personal Loans

In the case of personal loans, demand for refinancing has concentrated through loan comparison platforms. Kim Donggil (61), a bus driver living in Seoul, lowered his personal loan interest rate by 12.7 percentage points through 'Finda'. Kim said, "In June this year, after receiving a loan solicitation call from a credit card company, I borrowed 30 million KRW at 16.9% interest, paying 420,000 KRW monthly in interest alone." He added, "My daughter found out about this and checked through a loan comparison app, then refinanced to a regional bank loan at 4.2%, reducing the interest to 105,000 KRW."

According to the loan brokerage platform Finda, refinancing demand increased from about 9.6 billion KRW (509 cases) at the end of March this year to about 65.7 billion KRW (3,555 cases) at the end of June, and 108 billion KRW (5,660 cases) at the end of September. This rapid growth occurred during the period of rising interest rates, mostly involving moves from secondary financial institutions like card loans or savings banks to primary financial institutions.

A Finda official explained, "Among users who refinanced, 7 out of 10 lowered their interest rates, and 8 out of 10 increased their loan limits." He added, "On average, interest rates were lowered by 4.61 percentage points per person, and loan limits increased by 9.52 million KRW." So far, Hana Bank has been the only commercial bank participating in Finda's service, but Woori Bank is expected to join soon. As more commercial banks with relatively low interest rates participate, the effect of interest rate reduction could become greater.

Refinancing Loans Expected to Increase Further Next Year

The financial sector expects refinancing demand to continue increasing next year if the upward trend in interest rates persists. The Bank of Korea is highly likely to raise the base rate once more next month. On the 23rd, Bank of Korea Governor Lee Changyong stated, "Next year's base rate will be managed with a focus on price stability so that the inflation rate converges to the target level (2.0%)."

A commercial bank official said, "From 2017 to 2019, when the base rate was low, the proportion of mortgage borrowers choosing fixed interest rates was about 30-50% monthly, much higher than now. When these borrowers start to be applied variable interest rates, their interest costs will be much higher." He predicted, "Including these borrowers, refinancing demand will grow." Another bank official said, "If a refinancing platform including both first-tier and second-tier financial institutions, including the five major banks, appears by June next year, switching loans will become common."