[Exclusive] “With Rates So High, Who Would Take Out a Loan?”... Banks in ‘Meltdown’ Under Pressure to Offer 10-Year Fixed-Rate Mortgages

[Financial News] Financial authorities are drawing protests from banks as they press them to develop long-term fixed-rate mortgage products with terms of 10 years or more to ease borrowers’ burdens in an era of high interest rates. The longer the rate is fixed, the greater the risk for banks, meaning their funding costs inevitably rise. In addition, fixed rates on mortgages with terms of 10 years or more will be relatively high, making it all but certain that consumers will shun them and deepening banks’ concerns.

According to financial industry sources on the 15th, banks have been reluctant to follow recent guidelines from the authorities asking them to actively offer long-term fixed-rate mortgages with terms of 10 years or more. They say the products are not competitive despite the Financial Services Commission’s request. An official at a commercial bank said, “The authorities issue guidelines along the lines of, ‘If you extend 100 in loans, make a certain amount or more of them fixed-rate.’ We’re mainly meeting that target with five-year products, so there’s no reason to offer 10-year ones as well.”
Above all, banks say that institutional improvements to bring down rates on long-term fixed-rate mortgages with terms of 10 years or more must come first. A banking industry official said, “There are various ways to incentivize banks, such as reducing the burden of risk-weighted assets (RWA) or setting up a special fund for long-term financing. If that helped make 10-year fixed rates lower than five-year fixed rates, customers would have an incentive to choose them.” The idea is that, just as the government revised the method for calculating risk weights (RW) to expand productive finance, improving the RW calculation method for long-term fixed-rate mortgages would allow banks to offer products at lower rates.
A banking industry official said, “Borrowers compare even a 0.2-percentage-point difference between six-month variable rates and five-year fixed rates when choosing a product. Five years is already a long time, so 10-year fixed rates would need to be competitive enough to persuade them to choose one.” From a bank’s perspective, the more of these products it sells, the greater the burden of long-term funding costs. And as interest rates enter a period of increases, the funding rates banks have to bear will inevitably continue to trend upward.

The authorities are pressuring banks in an effort to reduce ordinary people’s interest burdens, even slightly, during a period of high interest rates. Earlier, on the 20th of last month, President Lee Jae Myung warned, referring to the continued rise in the real estate market, “More properties are coming up for auction, and delinquency rates are rising, too. If interest rates are adjusted (upward), there could come a time when people have to pay 2.5 times their previous interest payments. What are we going to do?”
A banking industry official argued, “Competition in mortgages is already fierce, and they are not very profitable for banks. Mortgages often serve as a kind of bait product to get customers to use other services, but lowering rates when designing products with terms of 10 years or more would make the burden even greater.” The point is that as the authorities pressure banks to ease borrowers’ burdens, banks have no choice but to lower lending rates, which increases the pressure on profitability.
As of the 13th, rates on five-year fixed-rate mortgages at the five major banks (KB Kookmin, Shinhan, Hana, Woori and NH NongHyup) stood at 4.42%–6.33% a year. Rates on six-month variable-rate mortgages were 4.43%–6.48% a year, with the lower end 0.01 percentage point and the upper end 0.15 percentage point higher than for five-year fixed-rate mortgages. Rates on variable-rate products have already begun to exceed fixed rates at both ends of the range.
A banking industry official said, “The gap between fixed and variable rates on mortgages has already widened considerably. Borrowers have no choice but to choose a product that lets them pay even 100,000 won less in interest right away.” The official added, “Because mortgages are sensitive to interest rates, refinancing usually takes place when prepayment fees are waived. Also, many people don’t stay in the same home for 10 years, instead selling it or moving to another home under a jeonse lease, so it remains uncertain whether a 10-year product would be useful.” The official continued, “If rates keep rising for 10 years, a fixed rate would obviously be more advantageous, but consumers burdened by interest payments now will find it difficult to consider the distant future.”
Another industry official said, “The average period for which a mortgage is kept is only about 4–5 years. With online loan switching now available, that period could get even shorter. And with competition among banks over rates intensifying, there won’t be much demand for 10-year products unless they offer a substantial rate advantage over variable-rate products.”
[email protected] Park Mun-su, Lee Hyeon-jeong Reporter