Rising Variable Mortgage Rates Prompt a Reconsideration of 'Fixed-Rate' Loans (Comprehensive)

Variable Mortgage Rates of 5 Major Banks Range from 3.73% to 5.05%
November COFIX Surges by Record 0.26 Percentage Points
Fixed Mortgage Rates Rise to Attractive 3.60% to 4.95% Range

[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 loans from banks. With variable-rate mortgage loan interest rates soaring into the 5% range and the Bank of Korea signaling additional base rate hikes early next year, the fear of rising interest costs is likely to intensify. As the era of sustained interest rate hikes arrives, fixed-rate (including hybrid fixed-rate) mortgage loan interest rates have become lower than variable rates, raising consumer interest in fixed-rate 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-rate mortgage loans, Kookmin Bank has also joined the 5% tier. This increase in variable-rate mortgage loan interest rates is linked to COFIX, which surged by a record 0.26 percentage points in November.

COFIX based on new transaction amounts has risen for six consecutive months since June, reaching 1.55%, the highest level since December 2019. In particular, 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 to increased deposit rates at banks, which in turn amplified the rise in COFIX. COFIX represents the weighted average interest rate of funds raised by eight domestic banks. It moves in response to increases or decreases in the interest rates of deposit products such as actual deposits, savings, and bank bonds handled by banks.

[Image source=Yonhap News]

The sharp rise in COFIX has caused variable-rate mortgage loan interest rates to skyrocket, even surpassing fixed-rate mortgage loan interest rates, which had previously been avoided due to their higher rates. As of this date, fixed-rate mortgage loan interest 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-rate mortgage loan interest rates ranged from 3.88% to 5.246%, exceeding 5% and were higher than variable rates (3.34% to 4.794%) at both ends. However, as the upward trend in the 5-year bank bond rates, which serve as the benchmark for fixed-rate mortgage loan interest rates, has slowed, an inversion between variable and fixed rates has emerged.

The banking sector anticipates at least two additional base rate hikes next year, leading to expectations that demand for switching from soaring variable-rate mortgage loans to fixed-rate loans will increase. In fact, inquiries about fixed-rate mortgage loan products have recently surged at some bank branches.

A bank official said, "Although there was a perception that fixed-rate products would be more advantageous during a period of rising interest 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."

However, existing borrowers should exercise caution when switching from variable to fixed-rate products. Although some banks have eased or waived prepayment penalties to facilitate switching, tightened loan regulations may affect the loan limits available. Meanwhile, credit loan interest rates have already exceeded 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 based on the third quarter data.

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