By Na Jeong-ju
Staff Reporter
Commercial banks are expected to unveil more fixed-rate mortgage products to attract more borrowers amid rising money market rates, prompting a change in the way people borrow money from lenders to buy their houses.
Analysts forecast the fixed-rate mortgage market will grow sharply in the coming months in line with a falling demand for mortgages of which interest rates are linked to money market rates.
Interest rates on certificates of deposit (CDs), the key money market rate determining floating-rate mortgage loans, is now hovering up to 7.74 percent, the highest in six years. Currently, about 95 percent of mortgage loans carry floating interest rates and rising CD rates have resulted in greater interest costs for borrowers.
Shinhan Bank, the country's second largest lender, said Sunday that it will sell housing loans with interest rates fixed for up to 30 years.
Users of the service can borrow loans of up to 70 percent of the market value of their houses, while the loan-to-value ratio is limited to 40 percent for variable-rate loan borrowers.
``We are the first South Korean commercial lender that has decided to release fixed-rate mortgages with a maturity of more than 15 years,'' the bank said in a press release. ``Mortgage borrowers will be able to compare our floating-rate loans with fixed-rate loans, and choose the better type in view of the market situation and the changes in interest rates.''
One of the key advantages of the fixed-rate mortgages is that borrowers can receive larger loans than borrowers of floating-rate loans. They can also enjoy tax returns, if they meet certain requirements, according to the bank.
Early this year, the Financial Supervisory Service lowered the ceiling of home-backed loans borrowers can receive from banks to 40 percent of the home price in a bid to stem speculative house trading. The regulation however is not applied to users of fixed-rate mortgages, and banks can offer up to 70 percent of the home price in loans, Shinhan said.
Shinhan's fixed-rate mortgage loans carry relatively low interest rates between 6.1 and 6.5 percent depending on their maturities and the credit standings of borrowers, which are lower than the average borrowing rate of floating-rate loans. With the loans, banks can issue mortgage-backed securities to raise funds, Shinhan officials said.
The fixed-rate mortgages had been handled by only the state-run Korea Housing Finance Corp. as commercial banks had only focused on floating-rate ones to get higher interest gains. Currently, floating-rate mortgages account for about 95 percent of the total amount of home-backed loans extended to households, while the remainder is fixed-rate ones.
Bank officials say the fixed-rate mortgages will help homebuyers cut borrowing costs significantly at a time when interest rates are rising.
Most borrowers have seen their interest payments surge in recent months as money market rates rose sharply, reflecting an increase in interest rates of certificates of deposit (CDs), to which most floating-rate loans are tied.
The average interest rate for the loans has risen to its highest level in six years, putting more households at greater risk of defaults amid the negative outlook for the housing industry.
The borrowing rates for floating-rate housing loans have risen about 0.4 percentage points over the past three months on the back of back-to-back hikes of short-term benchmark rates by the Bank of Korea (BOK) in July and August.