Soaring Variable Loan Interest Rates... Fixed Rates Gain Appeal

November KOFIX rises 0.26%p, marking the largest increase ever
Variable mortgage loan interest rates soaring

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi] The record-breaking surge in the Cost of Funds Index (COFIX), which serves as the benchmark for variable-rate mortgage loans, has significantly increased the interest burden on borrowers who have taken out loans from banks. With variable mortgage rates soaring into the 5% range and the Bank of Korea signaling further base rate hikes early next year, the fear of rising interest costs is likely to intensify. As the era of sustained rate hikes begins, fixed-rate (including hybrid fixed-rate) mortgage rates have fallen below variable rates, raising consumer interest in fixed-rate loan products.

According to the banking sector on the 16th, the variable-rate mortgage loan interest rates at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?are currently between 3.73% and 5.05%. Following Hana Bank, which had already surpassed the 5% mark for variable mortgage rates, KB Kookmin Bank has now joined the 5% club. This rise in variable mortgage rates is linked to COFIX, which jumped by a record 0.26 percentage points in November.

COFIX based on new loan amounts has risen for six consecutive months since June, reaching 1.55%, the highest level since December 2019. Notably, the additional 0.25 percentage point hike in the base rate and the financial authorities’ strengthened monitoring of the interest rate spread between deposits and loans have led banks to raise deposit rates, which in turn has amplified the increase in COFIX. COFIX represents the weighted average interest rate of funds raised by eight domestic banks. It moves in response to changes in deposit product rates such as savings accounts, time deposits, and bank bonds that banks actually handle.

The sharp rise in COFIX has caused variable mortgage rates to surge, even surpassing fixed mortgage rates, which had previously been avoided due to their higher rates. As of this date, fixed mortgage rates at the five major banks range from 3.60% to 4.95%, with both the upper and lower bounds lower than those of variable-rate products. In October, fixed mortgage rates ranged from 3.88% to 5.246%, exceeding 5% and remaining higher than variable rates (3.34% to 4.794%) at both ends. However, as the 5-year bank bond rates, which serve as the benchmark for fixed mortgage rates, have stabilized, an inversion between variable and fixed rates has emerged.

The banking sector anticipates at least two additional base rate hikes next year, which could increase demand for switching from soaring variable mortgage rates to fixed rates. In fact, inquiries about fixed-rate mortgage products at some bank branches have recently surged. A bank official said, "While there was a perception that fixed-rate products would be more advantageous during a period of rising rates, consumers hesitated because fixed rates were higher than variable rates. However, now that the gap has narrowed or fixed rates are even lower, many consumers prefer fixed-rate loans for new borrowing."

Meanwhile, credit loan interest rates have already surpassed the 5% annual level. According to the Bank of Korea and Statistics Korea, when household loan interest rates rise by 1 percentage point, the interest burden is estimated to increase by 12.8 trillion won as of the third quarter.

This content was produced with the assistance of AI translation services.