Mortgage Loan Interest Rate at 3%... So Why Is My Interest Still 5%?

Mortgage Loan Rates Bottom at 3% Range
Public Opinion: "Can't Feel It. Still 5~6%"
Existing Borrowers Will Feel It Only by End of June

"The reality is 5~6%, and the 3% range is just wishful thinking."

"They say the lower bound of the interest rate is in the 3% range, but is there anyone actually getting a loan at this rate?"

"My interest rate is still 6.6%."

Recently, mortgage loans from the five major banks have dropped to the 3% range, but public sentiment remains lukewarm. Financial consumers are uncertain about how many people are actually receiving mortgage loans at the 3% range. As of the 17th, the fixed interest rate for mortgage loans ranged from 3.64% to 5.82%. The banks offering the lowest rates in the 3% range were Kookmin Bank (3.64%), Hana Bank (3.96%), Woori Bank (3.87%), and NH Nonghyup Bank (3.92%).

A representative from a commercial bank explained, "This interest rate is what you can get after applying all preferential rates," adding, "Most preferential rate conditions depend on transaction performance such as changing your salary account, card usage, or subscribing to retirement pensions, but some conditions make it difficult to receive these benefits."

[Image source=Yonhap News]

All Conditions Must Be Met for 3% Range

For example, interest rate reduction benefits are available when using electronic real estate contracts or are limited to vulnerable borrowers. Another commercial bank representative said, "Some people are aware of these preferential rate conditions and opt for electronic contracts at brokerage offices, but even brokerage offices find it cumbersome, so very few people receive these preferential benefits," adding, "Vulnerable borrowers are also a minority, so in reality, only those who receive all these benefits can get rates in the 3% range, meaning not many people actually feel the 3% range interest rates yet."

Still, as interest rates have peaked in the second half of last year and are now declining, the actual proportion of loans with interest rates in the 3% range is gradually increasing. Until February, this trend was more noticeable in internet banks than the five major banks. According to last month's mortgage loan interest rate segment share (installment repayment method) from the Korea Federation of Banks Consumer Portal, the proportion of loans with interest rates between 3.5% and under 4% was 3.8% at K-Bank and 2.4% at KakaoBank. From December last year to January this year, there were no loans in the 3% range across all banks.

An internet bank representative explained, "When the March status is announced on the 20th, the number of loans in the 3% range will have increased compared to February," adding, "We also offer interest rate discounts for customers with no grace period or refinancing loans, allowing reductions of up to 0.6 percentage points." As of the 17th, KakaoBank's fixed mortgage loan interest rates range from 3.68% to 5.34% per annum.

[Image source=Yonhap News]

Interest Rate Drop Leads to Increase in Mortgage Loans

As bank loan interest rates fall, previously subdued mortgage loans are increasing again. According to the Bank of Korea, as of the end of March, mortgage loans (including jeonse deposit loans, with a balance of 800.8 trillion KRW) increased by 2.3 trillion KRW compared to the end of February. In February, bank mortgage loans decreased for the first time in 9 years and 1 month since January 2014 (-300 billion KRW), but returned to an increasing trend within a month.

Considering that jeonse deposit loans within mortgage loans decreased by 2.3 trillion KRW in March due to reduced demand from the shift to monthly rent and falling jeonse prices, the remaining general mortgage loans surged by about 4.6 trillion KRW in one month.

Existing mortgage borrowers will need more time to feel the impact of interest rate reductions. Variable interest rate loan products adjust rates every six months. The COFIX (Cost of Funds Index), which is the benchmark for variable interest rates, soared throughout the second half of last year but has been declining since January this year. Considering the variable interest rate recalculation cycle, existing borrowers are expected to visually confirm lower rates from banks within the second quarter. The COFIX announced last month for February was 3.53%.

A financial industry official said, "Since deposit interest rates have fallen this year, reducing banks' funding costs, the COFIX for March, to be released on the 17th, is very likely to fall below the base interest rate (3.5% per annum)," and predicted, "From the 18th, the lower bound of variable mortgage loan interest rates will also drop to the 3% range."