Despite the prediction that the Bank of Korea will freeze its benchmark interest rate again at the end of this month following the recent freeze on the base interest rate in the United States, the proportion of borrowers receiving fixed-rate loans, which are advantageous during periods of interest rate hikes, exceeded 90%. As high interest rates continue longer than originally expected, market expectations that the ‘interest hell’ will end are not reviving.
According to the financial sector on the 6th, the proportion of fixed interest rates among the home mortgage loans sold by the four major banks, including KB Kookmin, Shinhan, Hana, and Woori, in September was 91.2% on average, up about 3 percentage points (p) compared to the previous month. It has been on the rise for three months since last June.
The proportion of people choosing fixed-rate mortgages decreased from April until June, but has been rising since then. The proportion, which fell to 83.1% in June, later increased to 85.7% in July and 88.12% in August. During a period of rising interest rates, demand for fixed-rate loan products increases as interest rates are expected to rise further. This means that there are many borrowers who believe that interest rates will continue to rise.
According to the consumer trend survey conducted by the Bank of Korea, the interest rate level outlook CSI (Consumer Trend Index) in August was 118. When this index exceeds 100, it means that there are more people who answered that interest rates will be higher in six months than now than those who answered that they will fall.
This is because the market interest rate is showing a different movement from the base interest rate. Even though the Bank of Korea’s Monetary Policy Committee has frozen the base interest rate (3.5%) six times since last January, market interest rates are rising.
Looking at the 5-year bank bond (AAA rating) that banks use as the reference interest rate for mortgage loans, it soared from an average of 4.133% on January 13 to 4.810% at the end of last month.
Recently, the U.S. Federal Open Market Committee (FOMC) decided to freeze the benchmark interest rate at 5.25-5.5% at its regular meeting, raising the possibility that the Monetary Policy Committee will decide to freeze the benchmark interest rate for the seventh consecutive time on the 30th. However, the market does not believe that loan interest rates will fall. It is not happening.
When deciding to freeze interest rates, the Federal Reserve also issued a statement saying that even if it does not raise interest rates, it believes tightening will be effective due to the rise in U.S. Treasury yields.
There is also a view that banks’ marketing strategy is hidden in the high proportion of fixed interest rates selected.
Unlike borrowers who are burdened with interest every month, banks determine interest rate trends one to two years from a quarter to set financing and sales interest rates. For now, the high interest rate situation will remain, but as interest rates fall in the future and the time when variable interest rates become more advantageous approaches, a strategy to increase fixed interest rates is being developed.
Looking at Bank A’s interest rate in the last week of October, the interest rate for fixed (fixed for 5 years and then variable) mortgage products is 4.39-5.79% per annum, which is higher than the 4.58-5.98% per annum for variable-rate products (based on New Cofix). Everything at the bottom is set low.
An official from the banking industry said, “Right now, we have a strategy to increase the proportion of borrowers by selling fixed-rate products at a negative margin,” and added, “As this is a sales strategy that looks at at least one year, even if it is a loss right now, it will be fixed in the interest rate situation after the second half of next year.” “It was our internal judgment that interest rates were favorable for expanding sales,” he said.
Meanwhile, financial authorities are planning to introduce stress DSR (Debt Service Ratio) to variable interest rate products within the year to control household debt, so interest rates are rising due to policy influence.
An official from the financial authorities said, “This is a policy direction aimed at suppressing demand such as speculation,” and added, “We believe that selective supply is necessary for borrowers who may be willing to purchase houses for actual residence even in times of high interest rates.”
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.