The financial authorities will strengthen the institutional foundation for activating the supply of long-term and fixed-rate mortgage loans from banks. The Korea Housing Finance Corporation plans to push for the amendment of its law this year to promote the currently piloted 'bank covered bond guarantee and refinancing' as a regular business. When banks receive guarantees from government agencies, they can borrow money at lower rates, which will lead to a decrease in mortgage loan rates, allowing more financial consumers to choose long-term fixed rates.
According to the financial sector on the 24th, the Korea Housing Finance Corporation will pursue amendments to its law this year. This is to designate private covered bond guarantees and refinancing as regular business. This project has been operating since it was designated as an innovative financial service in April last year. A representative from the corporation noted, "The purpose is to establish a stable foundation for activating long-term fixed-rate mortgage loans in the banking sector," adding that discussions are underway regarding the legislative schedule related to the amendments with financial authorities.
Covered bonds are securities issued by financial companies, such as banks, backed by high-quality assets such as mortgage loans and national or public bonds. The funds raised through these bonds are mainly used to supply long-term fixed-rate mortgage loans.
The financial authorities have decided to encourage banks to issue covered bonds by strengthening the guarantees from the Korea Housing Finance Corporation. According to the Financial Services Commission, the interest rates on covered bonds issued by banks with an AAA credit rating that received guarantees from the corporation are approximately 0.05 to 0.21 percentage points lower than those of similarly maturing bank bonds. If the borrowing rate decreases, the rates for these products will also fall, aiming to increase the supply of long-term fixed-rate mortgage loans from banks.
The financial authorities aim to increase long-term fixed-rate mortgage loans to alleviate the interest burden on borrowers due to rising rates. However, the proportion of fixed-rate mortgage loans among commercial banks remains low. As of the end of last year, the average proportion of fixed-rate mortgage loans among the top four banks, KB Kookmin, Shinhan, Hana, and Woori, was 21.45%, falling short of the financial authorities' recommendation of 30%. The financial authorities ordered that the proportion of purely fixed or periodically fixed (with interest rate adjustment periods longer than five years) mortgage loans among the bank's own mortgage loans be increased to over 30% as of April last year.
The Korea Housing Finance Corporation also plans to launch a new product this year by purchasing bank-covered bonds and then issuing and selling securitized refinancing securities. Banks can utilize the funds raised through this for supplying long-term fixed-rate mortgage loans.