The gap between fixed and floating mortgage rates in South Korea has narrowed, complicating the math for borrowers preparing to take out home loans. With the upper end of floating-rate mortgages approaching 7%, borrowers who pick the cheaper floating option worry about further rate increases, while those who choose a fixed rate face a heavier interest burden right away.
As of the 23rd, the gap between floating-rate mortgages tied to the new COFIX benchmark and five-year hybrid mortgages at the five largest banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — stood at 0.20 percentage point at the lower end, down 0.35 percentage point from 0.55 percentage point at the end of September, according to financial industry sources on the 25th.
The gap at the upper end also narrowed to 0.20 percentage point from about 0.51 percentage point over the same period. The Cost of Funds Index (COFIX), the main benchmark for floating rates, rose 0.25 percentage point to 3.43% from 3.18%, while the five-year bank bond yield, the main benchmark for fixed rates, fell to 4.283% from 4.525%.
Fixed rates are usually set higher than floating rates because they reflect the risk banks take on by being unable to raise rates during the contract period even if market rates climb. But the two benchmarks have recently moved in opposite directions, narrowing the spread and deepening borrowers' dilemma. On a 500 million won ($347,000) loan balance, a 0.2 percentage point difference translates into about 83,000 won a month in interest, excluding principal repayment.
Adding to the difficulty is that the current spread alone offers little guide to which option carries the lighter total interest burden. The longer floating rates stay put, the longer a borrower enjoys the relatively lower rate. Borrowers on both fixed and floating terms can consider refinancing later, but the benefit may vary depending on lending rules, prepayment penalties and other costs.
"Even if the spread has narrowed for now, the cumulative interest burden can differ depending on a borrower's loan terms and where rates go from here," an official at a commercial bank said. "If rates fall, the burden on floating-rate loans could actually ease further, and even borrowers who chose a fixed rate can look at switching loans."
The Bank of Korea's decision on the 22nd to hold its benchmark rate while leaving the door open to further increases has made the choice harder still. One loan applicant facing a final payment next month said the spread had shrunk to around 0.3 percentage point from about 0.8 percentage point at the time of application. "Applying again is not easy because the settlement date is close," the applicant said. Another borrower facing a final payment in early December said, "There were many forecasts that rates would rise further, so I chose a fixed rate without hesitation."
Even as interest costs mount, household lending has picked up speed again this month as home prices in the greater Seoul area keep rising. Total household loan balances at the five largest banks stood at 783.4397 trillion won as of the 22nd, up 2.6058 trillion won from the end of the previous month. Balances had fallen 1.2852 trillion won in September, the first decline in six months, before turning higher again a month later. Mortgage loans alone rose 999.5 billion won from the end of the previous month, roughly eight times the 125.2 billion won increase recorded in September.