[Practical Finance] Burdensome Loan Interest, Focus on Refinancing Mortgage Loans at 3% Range

Borrower A recently eased the burden of rising interest costs. Thanks to the recently applied 'Mortgage Refinancing' service, A was able to reduce interest expenses. In November 2018, A took out a 35-year mixed (fixed) rate mortgage loan at an annual interest rate of 5.4% from a commercial bank. A switched to a mixed-rate product with an annual interest rate of 3.6% through the 'Online One-Stop Refinancing Infrastructure.' The reduced interest amounts to 250,000 KRW per month, which is nearly 3 million KRW annually.

The online one-stop 'Mortgage Refinancing' service, which started this month, is attracting borrowers' attention. Word has spread that it is easy to switch to a lower interest refinancing product via an application (app), and within four days of its launch, applications exceeded 1 trillion KRW in amount. Especially in the early stages of the launch, banks and other financial companies have offered products with interest rates in the 3% range, accepting lower profit margins to retain loans, thereby expanding borrowers' choices.

According to the banking sector on the 17th, many banks offering mortgage refinancing products as of the previous day propose annual interest rates in the low to mid 3% range. The bottom rates for mortgage refinancing products at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) range from 3.61% to 3.65% annually. Considering that the bottom rates for new variable-rate mortgage loans as of this day range from 4.00% to 5.145% annually, these rates are quite attractive.

Regional banks and internet-only banks competing with commercial banks offer even lower rates. Among internet-only banks, KakaoBank offers an annual rate of 3.42%, and K Bank offers 3.50%. Among regional banks, Daegu Bank, which is preparing to switch to a commercial bank, offers the lowest mortgage refinancing rate at 3.10%. Other regional banks such as Gyeongnam Bank (3.35%), Gwangju Bank (3.45%), Busan Bank (3.57%), and Jeonbuk Bank (4.08%) also maintain rates mostly lower than those of commercial banks.

The interest rates offered by banks are even lower than bank bond rates. According to the Bond Information Center, the 5-year bank bond rate was 3.773% as of the previous day, higher than the refinancing product rates of many banks. In addition to these low rates, companies are attracting borrowers with various events such as temporary interest waivers.

As a result, quite a few borrowers have already attempted mortgage refinancing. According to financial authorities, from the 9th to the 12th, about 96,000 borrowers checked their existing mortgage loans through loan comparison platforms or financial company apps, and an additional 38,000 borrowers checked the conditions of new loan products.

Furthermore, 5,657 borrowers who checked loan conditions applied for new mortgage loans, with the total amount of new loans reaching 1.0307 trillion KRW. Due to the nature of this service, which is conducted non-face-to-face and takes 2 to 7 business days to complete refinancing, only 16 borrowers completed all refinancing procedures during the same period. These borrowers saw their loan interest rates drop by an average of 1.5 percentage points, saving approximately 3.37 million KRW annually in interest expenses.

Because of the low interest rates, some internet-only banks exceeded their daily lending limits early after the service launch, causing service suspensions until the next day. A representative from a commercial bank said, "Since this is a non-face-to-face product, banks incur fewer costs and need to attract loans, so there is an atmosphere of aggressive marketing. Since daily and monthly limits are set for each bank, bottlenecks have occurred."

However, since mortgage refinancing targets are limited, eligibility must be carefully checked. Refinancing targets are mortgage loans secured by apartments valued at 1 billion KRW or less, with prices verifiable through KB and Korea Real Estate Board. Loans must have been executed at least six months prior, and policy financial products or products handled by specific contracted financial institutions are excluded. Additionally, loans that are overdue or involved in legal disputes cannot be refinanced.

Financial institutions are actively preparing refinancing products for this mortgage refinancing service. Samsung Life Insurance is conducting the service through its own app and Samsung Financial Networks' 'Monimo.' They plan to expand the mortgage refinancing service soon to fintech channels such as Naver Pay and Kakao Pay. Hanwha Life Insurance offers the service via Naver Pay and Kakao Pay, and Kyobo Life Insurance provides it through Naver Pay. Since 10 insurance companies and 4 savings banks and specialized credit finance companies participate in the Financial Services Commission's refinancing infrastructure (mortgage and jeonse loans), the number of secondary financial institutions offering mortgage refinancing services is expected to increase further.

At the end of this month, a refinancing service for jeonse deposit loans will also begin. The jeonse loan refinancing service will involve 18 banks and 3 insurance companies. For jeonse loans, applications can be made from three months after loan execution until half of the lease contract period (usually one year) has passed. Upon renewal, applications are allowed only from two months to 15 days before the lease contract ends. Similarly, refinancing is not possible if low-interest policy financial products are used or if the loan amount exceeds 1 billion KRW.