Banks are halting the sale of mixed-rate products and increasing the proportion of fixed-rate products in accordance with the financial authorities' directive to raise the share of 'pure fixed interest rates.' At the same time, as the interest rate on variable-rate loans rises, even if the base rate is lowered within the year, it is increasingly likely that fixed-rate products will have a lower interest rate than variable-rate products.
According to the Bank of Korea's economic statistics system on the 14th, the share of fixed interest rates based on the balance of housing mortgage loans was 65.7% at the end of February, up from 50.8% in December 2022, continuing to increase steadily. In contrast, the share of variable rates decreased from 49.2% to 34.3% during the same period.
A fixed interest rate applies throughout the term, while a variable rate changes every six months. A mixed rate refers to a product that applies a fixed rate for five years before switching to a variable rate. Generally, during periods of declining base rates, variable-rate products are popular due to their lower rates compared to fixed rates, while during rising base rates, the preference for fixed rates, which are set, increases.
For consumers looking to reduce interest rate volatility, mixed-rate products, which switch from a fixed interest rate to a variable rate after five years, have served as an important option. It has been the best choice for consumers contemplating between fixed and variable rates.
For this reason, there had been many mixed-rate products, but as authorities guided banks last year to increase the proportion of pure fixed rates, banks are raising the share of pure fixed rates. NongHyup Bank has halted the sale of mixed-rate products since September of last year, while Woori Bank stopped selling mixed-rate products in February. Internet-only banks such as Kbank and KakaoBank also ceased sales of mixed rates since May and September of last year, respectively.
In contrast, fixed-rate products are on the rise. Shinhan Bank launched a 10-year fixed-rate product in August of last year. The Industrial Bank of Korea also introduced a 10-year fixed-rate mortgage product starting in December of last year. Recently, iM Bank launched a 5-year fixed-rate mortgage product, which is different from mixed-rate products as it resets to a fixed rate for an additional five years at maturity.
The reason authorities have asked banks to increase the share of fixed rates is to reduce the risks for financial consumers stemming from variable rates. Financial authorities have been reinforcing administrative guidance to increase the proportion of pure fixed-rate sales in order to improve the structure of the domestic loan market, which is heavily reliant on variable rates.
In fact, as the base rate decreased, market rates also fell, leading to a temporary inversion where Kbank's variable rates were lower than fixed rates last month. Typically, due to risks and costs associated with rising rates, fixed-rate products have higher interest rates. For this reason, Kbank increased its variable rates through adjustments in the additional charge.
For now, if the current situation continues, fixed rates may be cheaper than variable rates, according to bank officials. Banks are raising the additional charges on variable rates following authorities' guidelines, making fixed rates potentially more attractive.
Moreover, the start of the stress debt service ratio (DSR) phase 3 this year is another variable. The stress DSR considers the possibility that financial consumers with variable rate loans may face increased principal and interest repayment burdens during periods of rising rates by imposing an additional charge when calculating the DSR.
A bank official noted, "For consumers who need to use housing mortgages now, it may be advantageous to choose a 5-year periodic fixed-rate product and then switch to another loan if market rates decrease further." They added, "Since the prepayment penalty rate has been halved compared to previous years from this year, switching is also more feasible."