A study by the Bank of Korea found that the higher the income and the more likely a person owns a home, the clearer the tendency to prefer variable rates when taking out a mortgage loan. By age group, this pattern was pronounced among people in their 30s and 40s.
According to the report "Analysis of interest rate choices by mortgage loan borrowers" published by the Bank of Korea on the 26th, policymakers have promoted the expansion of fixed rates to improve the structure of the domestic mortgage loan market, where the share of variable-rate loans has been high. The concern is that when the share of variable rates is high, interest burdens for vulnerable groups can rise sharply during periods of rate increases.
However, the share of fixed rates among mortgage loans handled by banks (based on balances) has recently seen its growth slow. The share of fixed rates, which was just 0.5% at the end of 2010, jumped to 43% in 2016, but the pace of increase moderated thereafter, reaching only 51.8% at the end of 2023.
This is low even compared with major countries. Looking at the share of fixed-rate mortgages by country compiled by the International Monetary Fund (IMF), Korea stood at 34.9% in the fourth quarter of 2022, far lower than Mexico (99.6%), the United States (95.3%), and France (93.2%).
The research team analyzed borrower characteristics to examine why the fixed-rate selection ratio has not risen further. The results showed that for each additional owned dwelling, the probability of choosing a variable-rate mortgage increased by 3.4 percentage points (p). When total income and total assets each rose by one decile, the probability of choosing a variable rate rose by 2.3 p and 1.5 p, respectively, and when total debt increased by one decile, it expanded by 1.1 p.
This tendency was particularly evident among people in their 30s and 40s. This age group is a period when income grows steadily and both assets and liabilities expand through dwellings and investments. Accordingly, it is interpreted that there is a stronger tendency to choose variable rates, which can reduce immediate interest burdens even at the risk of some rate increases.
By contrast, among those in their 20s and younger, the higher the level of education, the greater the understanding of and caution toward future rate fluctuations, leading to a stronger preference for fixed rates that can avoid the risk of rising rates. Among those in their 50s and older, asset conditions, repayment capacity, and risk preferences vary widely by individual, so no distinct interest rate selection pattern emerged.
Market conditions also affected rate choices. If the rate of increase in dwelling prices and the rate spread (fixed rate−variable rate) each widen by 1 percentage point, the probability of choosing a variable rate rises by 1.2 p and 6.5 p, respectively. As home prices rise, variable rates with lower initial interest burdens are preferred, and the larger the rate gap with fixed rates, the stronger the tendency to choose the relatively cheaper variable rate. By contrast, if expected future rates rise by 1 p, the probability of choosing a fixed-rate mortgage increases by 37.6 p.
The research team said, "Rather than setting a uniform target to expand the share of fixed-rate mortgages, policymakers need to design policies that more precisely reflect borrower characteristics and market conditions."