Interest Rates Expected to Drop Soon... Borrowers Face Tough Choice Between Fixed and Variable

"Even if interest rates drop, the pace may fall short of expectations... A cautious judgment is needed"

Financial consumers planning to purchase homes in the second half of the year are facing increasing concerns. With the growing possibility of interest rate cuts in the latter half of the year, it has become difficult to determine whether choosing variable or fixed interest rate loan products is more advantageous. The financial sector advises paying close attention to the current interest rate gap between fixed-rate and variable-rate products.

To slow down the pace of household loan growth, commercial banks are consecutively raising mortgage loan interest rates. On the 3rd, a loan information board was posted at a commercial bank branch in Euljiro, Jung-gu, Seoul. Photo by Jo Yongjun jun21@

According to the financial sector on the 17th, the gap between fixed/periodic interest rate and variable interest rate products among recent bank mortgage loans has widened to a ratio of 9 to 1. In fact, data from the Bank of Korea’s Economic Statistics System shows that as of July, 96.4% of newly issued mortgage loans were fixed-rate.

The reason fixed-rate products have become the new trend is that their interest rates are 0.7% to 1.0% lower compared to variable-rate products. Fixed-rate products typically attract attention during periods of rising interest rates. It is also interpreted that fixed-rate products are more favorable when calculating the Debt Service Ratio (DSR) compared to variable-rate loans, which increases the loan limit. Authorities are also encouraging the expansion of fixed and periodic rate products to ensure stable management of household debt.

In fact, after the implementation of the stress DSR phase 2, the difference in loan limits shows that fixed-rate products are more advantageous compared to variable-rate ones. According to a request made by this outlet to a bank, if a salaried worker earning an annual income of 75 million KRW takes out a 30-year mortgage loan with equal principal and interest payments at a 4.0% variable rate (6-month COFIX) in the metropolitan area, the maximum loan limit is 455 million KRW, which is 50 million KRW lower than before the stress DSR phase 2 implementation (500 million KRW).

However, if the same borrower takes out a periodic mortgage loan, the loan limit is 501 million KRW, which is only a 2.91% (15 million KRW) decrease compared to before the stress DSR phase 2 (516 million KRW). In reality, the loan limits for fixed and periodic products are significantly higher than those for variable-rate products.

However, some predict a possible change in this trend. This is because an interest rate cut by the U.S. Federal Reserve (Fed) within this year is considered highly likely. There is even speculation about a ‘big cut’ scenario where the Fed could lower rates by 0.50% at once.

Currently, the interest rate difference between mixed (fixed) or periodic products and variable-rate products can be more than 1 percentage point, but if the Fed and others proceed with rapid rate cuts in the future, choosing variable-rate products could be advantageous. Although the reduction effect on loan limits is greater for variable-rate products, for some borrowers, the interest rate itself may be more important than the loan limit.

The banking sector advises careful consideration before taking out loans, as the possibility of future rate cuts is high but the speed of such cuts is difficult to predict. A representative from a commercial bank said, “At present, the loan interest rates for fixed and periodic products are about 0.7 to 1.0 percentage points lower than variable-rate products, so most borrowers choose fixed rates,” but added, “If interest rate cuts are implemented in the future, this gap will inevitably narrow.”

The representative also said, “While everyone expects the Fed to cut rates, the general sentiment is that the pace will not be as fast as during the previous rate hikes. Considering the speed of rate cuts and the timing of exemption from prepayment penalties (3 years), if the interest rate difference between fixed and variable products confirmed through borrower consultation is within about 0.2 to 0.3 percentage points and not large, choosing variable-rate is reasonable; if the difference is significant at around 0.7 to 1%, choosing fixed-rate is more rational.”