Mortgage Variable Interest Rates Dropped Again... Fixed or Variable?

Confusion over the timing of interest rate cuts by the U.S. Federal Reserve (Fed) is increasing concerns among financial consumers preparing for new mortgage loans. Recently, the proportion of variable-rate products, which had been stagnant for a while, is rising again.

In the banking sector, even if interest rate cuts are implemented in the second half of the year as predicted, they will not be immediately applied to loan interest rates. Therefore, it is advised to weigh the pros and cons based on the current interest rate level rather than making premature predictions about the base rate.

According to the financial sector on the 20th, the variable-rate mortgage interest rates of the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) as of the 17th were between 3.80% and 6.80% based on the new Cost of Funds Index (COFIX). This represents a decrease of 0.06 percentage points at the upper end and 0.10 percentage points at the lower end compared to early last month (3.90% to 6.86%).

The background to this slight decline appears to be a combination of falling market interest rates and household loan management by financial authorities and banks. With the decline in deposit interest rates, COFIX fell by 0.05 percentage points from the previous month to 3.54% last month, marking five consecutive months of decline. However, household debt continues to rise, with mortgage loan increases alone reaching 4.5 trillion KRW last month, prompting adjustments in interest rates.

In contrast, mixed (fixed-rate) mortgage loans are rebounding. The mixed mortgage interest rates of the four major banks range from 3.34% to 5.70%, with the upper end similar to early April (3.06% to 5.70%) but the lower end rising by 28 basis points (1bp = 0.01 percentage points). The increase in mixed mortgage rates is due to the rising yields on bank bonds, which serve as the benchmark rates.

According to the Korea Financial Investment Association, the yield on 5-year AAA-rated bank bonds was 3.731% on April 1, but tensions between Iran and Israel escalated, pushing the yield close to 4% at 3.956% by the end of April. As the Middle East conflict has somewhat eased, bank bond yields have been hovering around 3.7% to 3.8% this month.

With variable and mixed mortgage rates showing different trends, financial consumers are facing deeper dilemmas. Comparing the interest rate gap between mixed and variable-rate mortgages, the upper and lower ends were 0.84 percentage points and 1.16 percentage points respectively in early last month, but as of the 17th, these gaps narrowed to 0.46 percentage points and 1.10 percentage points.

Interest rate forecasts are also changing rapidly. Until last month, there were even expectations of rate hikes due to the Iran-Israel conflict, but recently, the U.S. Consumer Price Index (CPI) for April showed a better-than-expected increase of 3.4%, raising the possibility of rate cuts again in the second half of the year.

In this situation, the proportion of variable-rate new mortgage loans, which had been stagnant for some time, has been steadily increasing this year. According to the Bank of Korea, the share of variable-rate new mortgage loans was 34.1% in January, 34.4% in February, and 42.5% in March, indicating a rising trend. This suggests that more financial consumers expect interest rate cuts soon.

However, the banking sector advises that it is more advantageous to evaluate the gains and losses based on current interest rates rather than betting on fluctuations in the base rate. Although the base rate does affect loan interest rates, the time lag in its application cannot be ignored.

A representative from a commercial bank said, "Financial consumers who chose variable rates this year seem to believe that if the Fed cuts the base rate two to three times within the year, the Bank of Korea will follow and adjust rates accordingly. However, there is a time lag between the Fed and the Bank of Korea's rate cuts, and also between base rate cuts and loan interest rate reductions, which should not be overlooked."

He added, "If the gap between mixed and variable rates is not large, variable rates have much merit, but if there is about a 50 basis point difference, it is better to choose mixed rates first and then switch to variable rates after three years. Due to stricter Debt Service Ratio (DSR) regulations, it may not be possible to refinance existing loans with the same amount, but in that case, it is more reasonable to take out a loan at a lower interest rate at the current loan time."