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🇰🇷 South Korea /Economy & Trade

Borrowers flock to cheaper variable rates, but fixed loans may prove safer as rates rise

From Hankyoreh · () Korean

Translated from Korean and summarized by DistantNews. Read the original for the full story.

At a glance

Explainer Named sources Context piece
  • Variable mortgage rates at major South Korean banks were below five-year fixed rates as of Aug. 28, prompting more borrowers to choose them.
  • The share of fixed-rate household loans fell to 21.0% in July, while the fixed-rate share of mortgage lending dropped to 31.9%.
  • Bank officials said fixed rates can protect borrowers from further increases, especially on large housing loans with long repayment periods.

Borrowers in South Korea are choosing variable-rate loans because they currently cost less, even as interest rates continue to rise. At Shinhan Bank on Aug. 28, six-month variable mortgage rates ranged from 4.21% to 5.62%, compared with 4.68% to 6.09% for five-year fixed loans.

Customers are being pushed toward variable rates because fixed rates have generally risen above 5%.

— Kim Ki-youngThe Shinhan Bank team leader described why borrowers are choosing variable loans.

Woori Bank showed a similar gap. Its six-month variable rates ranged from 4.69% to 5.89%, while five-year fixed rates stood at 5.35% to 6.55%. The difference reflects the benchmarks used for each product. Fixed loans generally track five-year financial bonds, while variable loans use six-month rates.

The shift toward variable rates has reduced the fixed-rate share across household lending. Bank of Korea data showed that fixed-rate loans accounted for 21.0% of new household lending in July, down from 22.7% in June and the lowest level since May 2022. The fixed-rate share of mortgage lending fell from 37.7% to 31.9%, its lowest point since February 2014.

Looking only at the rate applied today, a variable rate may appear advantageous, but if market rates continue to rise, the total interest burden over the entire loan period may be lower with a fixed rate.

— Kang Min-seongThe Woori Bank official warned that current prices do not determine total borrowing costs.

Bank officials said the cheaper rate today does not necessarily mean a lower cost over the full life of a loan. A fixed rate can limit the risk of rising repayments, although policy-backed products such as jeonse and home-purchase loans complicate comparisons. With the Bank of Korea raising its policy rate by 0.25 percentage points to 3.00% in August and signaling further increases, officials said borrowers with large housing loans and long repayment periods are increasingly considering fixed rates. One banker said the roughly 0.5 percentage-point premium on fixed loans suggests markets are already pricing in the possibility of further rate increases.

In the current financial environment, where further rate increases are expected, borrowers with large housing-related loans and long repayment periods are showing a stronger tendency to choose fixed rates.

— Kang Min-seongHe described the choice facing mortgage borrowers.
About this summary

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized automatically by DistantNews, with a note on how the source frames the story. Not individually reviewed before publishing. How this works.

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