Shinhan Bank has introduced the first 10-year fixed-cycle mortgage loan product in the banking sector. The aim is to activate long-term, fixed-rate mortgage loans to reduce borrowers' burdens caused by sudden interest rate fluctuations. However, some skepticism remains about whether such fixed-rate products can attract consumers, given that central banks around the world, including the U.S. Federal Reserve (Fed) and the Bank of Korea, have signaled potential interest rate cuts.
According to the financial sector on the 9th, Shinhan Bank established the 10-year fixed-cycle mortgage loan product on the same day. The announced interest rates for the 10-year fixed-cycle product range from 3.38% to 5.39% per annum, which differs by only about 0.1 percentage points on both the upper and lower ends compared to the existing 5-year fixed-cycle mortgage loan product rates. This also shows a considerable difference compared to the 41.6 basis points (1bp=0.01%) spread between 5- and 10-year financial bonds.
The 10-year fixed-cycle mortgage loan refers to a mortgage loan product based on 10-year financial bonds. Since it applies a fixed interest rate for a relatively long period of 10 years compared to existing fixed-rate mortgage loans, borrowers have the advantage of minimizing risks caused by sudden interest rate changes.
Financial authorities have also actively encouraged the expansion of long-term, fixed-rate private mortgage loans starting this year by promoting the issuance and investment of covered bonds with dual recourse rights. Covered bonds refer to asset-backed securities issued with high-quality assets such as mortgage loans held by banks as collateral.
In particular, the authorities have supported payment guarantees for bank-issued covered bonds through the Korea Housing Finance Corporation (HF). In this case, the issuance interest rate is about 5 to 21 basis points lower than financial bonds, reducing banks' funding costs and ultimately enabling lower interest rates for the 10-year fixed-cycle mortgage loans to be launched.
Accordingly, Shinhan Bank plans to conduct a demand survey for 10-year covered bonds to launch the 10-year fixed-cycle mortgage loan product on the same day. Covered bonds refer to asset-backed securities issued with high-quality assets such as mortgage loans held by banks as collateral. The issuance scale is reported to be around 200 to 300 billion KRW. A Shinhan Bank official stated, "Once the demand survey is completed this afternoon, we plan to issue (the covered bonds) early next week."
However, some in the financial sector point out that the impact of this 10-year fixed-cycle mortgage loan product may inevitably be limited. The anticipated interest rate cuts are a representative reason. The market expects the Fed to cut the benchmark interest rate in September, with some forecasts suggesting a 'big cut' of up to 50 basis points. The Bank of Korea is also likely to implement rate cuts around a similar time.
A financial sector official said, "The initially announced interest rate levels are not bad, but the problem is that expectations for interest rate cuts are growing," adding, "If benchmark rate cuts continue steadily, the number of borrowers considering variable-rate loans instead of fixed-rate loans is likely to increase."
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