Banks pull cheaper variable-rate mortgages, squeezing homebuyers

Variable-rate mortgage products are quietly disappearing from the Korean banking market. As borrowers show signs of rushing toward variable-rate loans — which carry lower rates than fixed-rate products — some banks have preemptively suspended those offerings to stay within household lending caps set by regulators. The situation is set to worsen as the Bank of Korea signals the start of a sustained rate-hiking cycle.

Industrial Bank of Korea suspended variable-rate mortgage lending at all branches nationwide starting Tuesday, the bank confirmed Sunday. Refinancing from other banks is also suspended, with no restart date set. The bank will continue to offer five-year cycle, 10-year cycle and fixed-rate mortgage products. "This is a preemptive measure to manage our household lending volume," a bank official said.

NH NongHyup Bank, one of the country's five major lenders, stopped accepting in-person applications for its NH housing mortgage product starting June 1. The product is now available only through select non-face-to-face channels such as mobile apps, and even those are subject to monthly volume limits.

The moves are widely seen as an effort to curb demand before it surges further, as variable-rate mortgages are now priced up to about 1 percentage point below fixed-rate loans. As of Friday, the gap between the upper-end rates on fixed- and variable-rate mortgages at the four major banks — KB, Shinhan, Hana and Woori — stood at 1.04 percentage points, a sharp widening from just 0.08 percentage points at the end of last year. Variable-rate mortgages are benchmarked to COFIX, a lagging indicator of market rates, and analysts say the gap has widened as market rates have risen sharply in recent months amid tensions in the Middle East.

According to the Bank of Korea, the share of new variable-rate mortgage borrowers reached 58.4 percent in May based on new loan originations — the highest since 60.5 percent in June 2021. The June figure is expected to climb further.

Banks have even less room to maneuver in July, as their capacity for new household lending has been nearly exhausted, leaving them little choice but to further restrict variable-rate products. The combined household loan balance at the five major banks — excluding policy loans — stood at 649.54 trillion won ($442 billion) as of Thursday, already exceeding the annual target set by financial regulators by about 230 billion won.

Other banks are also reviewing additional restrictions, such as cutting variable-rate mortgage limits, partly out of concern that tightening at one lender will simply push demand to rivals — a so-called balloon effect common in the lending market. "Lending capacity is tight across the board, so there is no choice but to suppress additional demand," an official at one commercial bank said. "Financial regulators are also encouraging banks to steer borrowers toward fixed-rate products during a rate-rising period."

Prospective homebuyers are finding their options increasingly limited. Fixed-rate loans are generally considered the safer choice during a rate-hiking cycle because they eliminate exposure to rate fluctuations. Yet with the gap between fixed and variable rates hovering around 1 percentage point, even lending specialists within the banking industry are in many cases still recommending variable-rate products.

The Bank of Korea's tightening stance adds another headwind for borrowers. The central bank began raising its benchmark interest rate on July 16 and is expected to hike further in the second half of the year. Markets expect the upper-end rate on fixed-rate mortgages to reach 8 percent before the end of this year.