Evaluating Borrower's Net Yield in Long-Term Fixed Rate Mortgage Loans in Korea

Abstract

The Korean government has tried to change the structure of residential mortgages in Korea from the short-term variable-rate non-amorting loans to the long-term fixed-rate amorting loans since the early 2000’s. This study examines he borrower’s net yield from that new type of loans, which is defined as the difference between the lender’s yield out of the borrower’s repayment and the borrower’s yield from the expected gain on the portion of housing equity funded by cosnumer. The main hypothesis tested is that the borrower’s net yield will be affected by the time of loan origination and the level of mortgage interest rate charged because the future fluctuations of housing values and that of market interest rates are expected to be key determinants. The results confirm the hypothesis in that borrower’s net yields show positive or negative values according to the time of loan start, the level of fixed loan rates, or home regions. The results documented can offer a useful information as to the financial consumers’decision on loan amount and the timing of loan application considering the housing and mortgage market condition, which in turn can provide policy implication to regulating the maximum loan-to-value (LTV) ratio regulations.