The average interest rate for variable-rate housing mortgage loans has dropped to around 3%, quickly narrowing the gap with fixed-rate housing mortgage loans. In July of last year, the interest rate for variable housing mortgage loans was 0.64 percentage points higher than that of fixed-rate loans, but within a year, the difference has narrowed to 0.07 percentage points.
While it had been advantageous to choose fixed-rate housing mortgage loans, the situation has changed. There are analyses suggesting that it may be reasonable to select variable-rate housing mortgage loans as the base rate is expected to trend lower.
According to the Bank of Korea's economic statistics system on the 20th, the weighted average interest rate for fixed-rate housing mortgage loans newly handled by domestic banks in June is 3.92%. The average interest rate for variable-rate housing mortgage loans was reported at 3.99%. The drop in the average interest rate for variable-rate housing mortgage loans to around 3% is the first occurrence in over three years since June 2022 (3.87%).
The interest rate gap between fixed and variable housing mortgage loans is also narrowing quickly. Banks have maintained low fixed rates and high variable rates as the government has ordered them to increase the ratio of fixed-rate housing mortgage loans to manage household loans stably. However, as the decline in the standard for variable housing mortgage loans, the Cost of Funds Index (COFIX), steepened, the gap that had reached up to 0.9 percentage points has narrowed to two decimal points.
The COFIX rate has recorded a decline for ten consecutive months. The COFIX rate, which was 3.40% in September last year, fell to 2.51% in July, a decrease of 0.89 percentage points. In contrast, the interest rate for the 5-year financial bonds (AAA), which serves as the standard for fixed-rate housing mortgage loans, only dropped from 3.33% (as of Sept. 2, 2024) to 2.844% on the 18th, a decline of 0.48 percentage points.
Financial consumers preferred fixed-rate housing mortgage loans despite the rising interest rates. However, analysts suggest that choosing variable-rate housing mortgage loans could be advantageous if the trend of declining market interest rates accelerates. Experts advise that, as the pace of base rate cuts could speed up, it may be better to choose variable-rate housing mortgage loans to reduce interest burdens.
Park Tae-hyung, the PB branch manager at Woori Bank's TCE Signature Center, noted, "With the likelihood of a rate cut in the U.S. in September and the increasing probability of rate cuts in Korea, the market interest rate has recently fallen rapidly, lowering the variable-rate housing mortgage rate. I believe that if the interest rate advantages of fixed-rate housing mortgage loans are not significant, choosing variable-rate loans will be more favorable in reducing interest."
However, it is essential to consider that the lending limits for variable-rate housing mortgage loans are relatively lower than those for fixed-rate loans. A financial consumer with an annual income of 50 million won receiving a mortgage loan with a 5-year fixed rate (mixed type) in the metropolitan area would have a lending limit of 297 million won under the three-tier stress DSR (1.5%). However, if the loan is taken at a variable interest rate, the limit reduces to 287 million won. This is similarly the case in non-metropolitan areas under the DSR (0.75%) application. The limit with fixed-rate loans can reach up to 323 million won, but if taken at a variable rate, it would decrease to 312 million won.