Borrowers Face Higher Payments as Fixed-Rate Periods End

Borrowers who took out five-year hybrid mortgages during a low-interest period are now facing the reset of their interest rates. Those who initially enjoyed rates in the 2-3% range may see their payments increase significantly as they transition to current rates around 5%. Nearly 70% of recent borrowers have opted for variable rates, adding to the financial strain as both South Korea and the United States have raised their benchmark interest rates.

According to financial sources on September 18, borrowers who secured five-year hybrid mortgages in 2021 are seeing their fixed-rate periods end this year. Hybrid mortgages typically offer a fixed rate for the first five years, after which the rate is reassessed every six months or annually.

For instance, if a borrower took out a 300 million won loan at an annual rate of 2.98% in August 2021, their initial monthly payment would be approximately 1.26 million won. After five years, with a remaining principal of about 266.6 million won, if the new rate is set at 5.15%, their monthly payment would rise to about 1.58 million won, an increase of 320,000 won. This translates to an annual increase in principal and interest payments of about 3.84 million won.

In a similar scenario, a borrower with a 500 million won loan would see their monthly payment jump from about 2.1 million won to 2.64 million won, resulting in an additional annual burden of around 6.4 million won. The actual reassessed rate and payment amounts may vary based on the specific loan terms, benchmark rates, and any preferential conditions.

The exposure to rising interest rates is not limited to past hybrid loan borrowers. According to the Bank of Korea, as of July, 68.1% of new mortgage loans were issued at variable rates. This means that nearly seven out of ten new loans are subject to fluctuations in market interest rates, reflecting expectations of lower future rates compared to fixed-rate options.

However, recent trends in interest rates have not aligned with borrowers' expectations. Following two consecutive rate hikes by the Bank of Korea, the U.S. Federal Reserve raised its benchmark rate by 0.25 percentage points to a range of 3.75% to 4.00% on September 16. With the Fed leaving the door open for further increases, domestic market rates may continue to face upward pressure.

The new loan-based COFIX, which serves as a benchmark for variable-rate mortgages, remained at 3.18% last month, unchanged from the previous month. Although the upward trend that began in March has paused, there is a possibility that recent increases in deposit and bank bond rates will be reflected with a delay.

Borrowers with variable-rate products that reassess rates every six months will start to feel the impact of the changing rate environment from loans taken out in the first half of this year. As of the previous day, the mortgage rates at the four major banks—KB Kookmin, Shinhan, Hana, and Woori—were reported to be between 4.95% and 6.91% for fixed and hybrid loans, and between 4.29% and 6.00% for variable loans.

As the likelihood of further rate increases grows, more borrowers may consider switching from variable to fixed-rate loans. For example, a borrower with a 300 million won balance and a remaining term of 25 years could see their monthly payment decrease from about 1.78 million won at a 5.15% variable rate to approximately 1.71 million won at a 4.75% fixed rate, saving about 70,000 won per month.

If both rates remain constant throughout the remaining term, the total interest savings could amount to approximately 20.92 million won. However, if variable rates decline in the future, the actual savings may be less. The refinancing rate will also depend on the borrower's creditworthiness, collateral value, and any preferential conditions.

Borrowers should also consider prepayment penalties. For a 300 million won loan with a penalty rate of 0.65%, the initial cost would be 1.95 million won. To offset this cost with the monthly payment reduction, it would take about 28 months. However, actual penalties may vary based on the elapsed time since the loan was issued and the bank's calculation methods. Many products waive penalties after three years, allowing borrowers who took out hybrid loans in 2021 to switch without additional fees.

Experts advise that borrowers should evaluate not only interest rate forecasts but also the duration of the loan, the rate reassessment period, and prepayment penalties when deciding on loan types.

Jo Dong-geun, an emeritus professor of economics at Myongji University, stated, "Given the U.S. is raising rates, it is unlikely that South Korea can diverge from this trend, suggesting the possibility of further rate hikes. In a rising rate environment, choosing fixed-rate mortgages over variable ones may help reduce interest payment volatility."