Variable Interest Rates on Mortgage Loans Surpass 5%... Increased Interest Burden Expected Next Year

Four Major Banks' Variable Interest Rates Rise Up to 5% per Year
Base Rate Hike Expected... Upward Trend to Continue Next Year

Archive photo / Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Ki Ha-young] The variable interest rate on mortgage loans has risen by nearly 0.3 percentage points over the past 20 days. Since 75% of mortgage borrowers follow this variable rate, and with an additional base rate hike expected next year, the interest burden is projected to increase.

According to the financial sector on the 19th, as of the 17th, the variable interest rates on mortgage loans (new COFIX-linked) from KB Kookmin, Shinhan, Hana, and Woori Banks range from 3.710% to 5.060% per annum. Compared to last month on the 26th (3.440% to 4.981%), the lower bound increased by 0.27 percentage points in 20 days, and the upper bound rose by 0.079 percentage points, surpassing 5%.

On the other hand, during the same period, the mixed (fixed) interest rates on mortgage loans fell from 3.82%?5.128% to 3.58%?4.91%. The lowest rate dropped by 0.24 percentage points, and the highest rate decreased by 0.218 percentage points.

For unsecured loans, the current interest rate for grade 1 borrowers over one year is 3.384% to 4.730%. Compared to last month on the 26th (3.431% to 4.630%), the lower bound decreased by 0.047 percentage points, but the upper bound increased by 0.100 percentage points.

The rise in variable mortgage loan interest rates is due to the COFIX benchmark rate increasing by 0.26 percentage points within a month. COFIX is an index that indicates how much cost (interest rate) eight domestic banks incur to raise funds for loans. It reflects changes in interest rates of deposit products such as actual savings, time deposits, and bank bonds handled by banks. Breaking down the COFIX changes by components, about 70?80% comes from savings and time deposit rates. After the Monetary Policy Committee raised the base rate by 0.25 percentage points on the 25th of last month, commercial banks simultaneously raised savings and time deposit rates by 0.25 to 0.3 percentage points, causing COFIX to rise by a similar margin.

Conversely, fixed mortgage loan rates and unsecured loan rates follow market rates (bond yields) as benchmark rates. Since market rates, which surged until early November, have recently declined, these rates have also reversed downward. According to the Korea Financial Investment Association’s Bond Information Center, the 5-year bank bond (AAA, unsecured) yield, which is mainly used as a benchmark for fixed mortgage loan rates, fell from 2.311% on November 26 to 2.19% as of the 17th, a decrease of 0.121 percentage points. The 1-year bank bond (AAA, unsecured) yield, the benchmark for unsecured loan rates, also dropped from 1.738% to 1.698%, a decrease of 0.040 percentage points during the same period.

This upward trend in variable interest rates is likely to continue until the first half of next year. As the US Federal Reserve’s base rate hike schedule is being accelerated, the Bank of Korea’s Monetary Policy Committee is expected to raise the base rate by another 0.25 percentage points around January or February. On the 25th of last month, Lee Ju-yeol, Governor of the Bank of Korea, stated, "A base rate of 1.00% is still accommodative," and added, "The possibility of a base rate hike in the first quarter of next year cannot be ruled out."

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