"Should I Refinance or Pay It Off First?" Borrowers Scramble to Cut Interest Costs Amid High Rates [Back to an Era of High Interest Rates]

[Financial News] As interest rates enter a full-fledged upswing, borrowers are facing increasingly complicated choices. Mortgage borrowers, in particular, are weighing whether to keep their lower-rate variable mortgages or switch to fixed-rate loans. If they have spare cash, whether they put it in a deposit or pay down their loans first can also significantly affect their interest burden in an era of high rates.

According to financial industry sources on the 23rd, inquiries from borrowers have increased as market interest rates rise following a series of base-rate hikes. Assuming an outstanding loan balance of 300 million won, a remaining term of 30 years and equal principal-and-interest payments, the monthly payment would be about 1.61 million won at an annual interest rate of 5%. If the rate rises by 1 percentage point to 6%, the payment would increase to about 1.8 million won; at 7%, it would reach approximately 2 million won per month. The larger the loan balance and the longer the remaining term, the greater the burden from changes in interest rates.
Borrowers considering refinancing because of high interest rates should carefully compare fixed- and variable-rate loans. At the five major commercial banks—KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank—the lower end of six-month variable-rate mortgage loans is currently in the 4.2% range per year, while five-year fixed-rate loans are in the 4.9% range. Assuming a 300 million won loan with a 30-year term, the monthly payments would be about 1.47 million won and 1.59 million won, respectively, making the variable-rate option approximately 120,000 won cheaper.
However, if the variable rate rises by 1 percentage point, the monthly payment would increase to about 1.65 million won; a 1.5-percentage-point increase would push it to approximately 1.74 million won, surpassing the fixed-rate payment. Variable rates are currently more favorable, but the advantage of fixed rates grows the further rates rise and the longer they remain elevated. Borrowers therefore need to consider both how long they will keep the loan and how much rates could increase.
The interest rate alone should not determine the decision. Borrowers must calculate their actual savings after factoring in additional costs such as early repayment fees and stamp duty, as well as preferential rates that may be lost during refinancing. Even if refinancing saves 100,000 won per month, it would take 10 months to recover related costs of 1 million won. The financial benefit would be smaller for borrowers planning to repay the loan or refinance again before then.
Extending the loan term is another option. For a 300 million won loan at an annual interest rate of 5%, extending the term from 30 to 40 years would reduce the monthly payment by approximately 160,000 won. However, total interest would increase by about 100 million won.

Should borrowers pay down their loans first when they have spare cash? Consider a borrower with a 5% annual interest-rate loan and 30 million won in cash. If the money is placed in a deposit paying 4% annually, the interest earned over one year would be approximately 1.02 million won after deducting the 15.4% interest income tax. By contrast, repaying 30 million won of the loan principal could reduce the first year's interest burden by up to about 1.5 million won. To achieve an effect comparable to repaying a 5% loan, the deposit rate would need to be approximately 5.9% before taxes.
Borrowers should also consider whether they need emergency funds and whether repaying the loan would affect preferential-rate conditions. Checking whether they are eligible to request an interest-rate reduction is another option. For deposits and bonds, borrowers should compare not only the advertised rate but also early-withdrawal terms, maturity and the risk of price fluctuations.
A financial industry official stated, "Borrowers react sensitively to the interest-rate differences right in front of them, so it is not easy for them to make choices that are advantageous in the long term," adding, "That is why it is difficult to increase the share of fixed-rate mortgage loans." The official continued, "During a period of rising rates, borrowers need to consider various factors together, including not only the rates currently offered but also the possibility of future rate changes and how long they will keep the loan."
[email protected] Seo Ji-yoon Reporter