'Yeongkkeuljok' Face Colder Year-End... Interest Rate Rise, Kopix Hits Highest This Year

COFIX at 3.97% in October... Highest This Year
Interest Rates Rise from the 16th
Borrowers Who Took 500 Million Won Mortgage at 4% Last Spring Face 700,000 Won Increase in Interest

On the 14th, in a real estate-dense shopping area in Songpa-gu, Seoul, where the decline in real estate prices and the transaction freeze phenomenon continue, apartment listings with market prices are posted. Photo by Kang Jin-hyung aymsdream@

Variable interest rates on mortgage loans rose again starting from the 16th. Borrowers who took out loans with variable rates that change every six months, known as Yeongkkeuljok (those who borrow to the limit, even to the soul), will face even tougher financial conditions by the end of the year. This is due to the COFIX (Cost of Funds Index), which serves as the benchmark for mortgage variable rates, reaching its highest level of the year.

The day before, the Korea Federation of Banks announced that the October COFIX (based on new transactions) rose by 0.15 percentage points from the previous month to 3.97%. As bank deposit and savings interest rates and bank bond yields increased, the cost of funds rose, causing COFIX to increase as well.

How much will the principal and interest burden increase for Yeongkkeuljok? A simulation of a borrower who took out a 500 million KRW mortgage loan with a variable rate at a commercial bank in May last year showed that as of November this year, the monthly payment burden increased by more than 700,000 KRW.

Variable interest rates move in the same direction and magnitude as COFIX. From the loan origination date to last November, and during the three times the loan interest rate changed in May and November 2023, COFIX rose from 1.84% to 3.97%, and the loan interest rate increased from 4.05% to 6.18%. As interest increased, the monthly payment jumped from 2,105,268 KRW to 2,806,724 KRW.

On the 16th, the variable mortgage rates at Kookmin Bank, Woori Bank, and NH Nonghyup Bank ranged from 4.73% to 6.66%, rising by 0.1 to 0.15 percentage points compared to the previous day. Fixed mortgage rates ranged from 4.03% to 6.23%, which is lower than variable rates. Financial authorities are also trying to increase the proportion of borrowers choosing fixed rates, considering that variable rates pose a burden on Yeongkkeuljok during periods of rising interest rates.

The Financial Services Commission's 'Variable Rate Stress DSR (Debt Service Ratio)' policy, to be applied within this year, reflects this intention. The key is to factor in the risk of future interest rate fluctuations when calculating loan limits. A Financial Services Commission official explained, "Since interest rates one year later may differ from current rates, this is reflected in the DSR calculation in advance."

For example, a borrower with an annual income of 50 million KRW taking out a loan at a 4.5% variable rate (50-year term) can currently borrow up to 400 million KRW. However, if a 1 percentage point additional rate is applied, the loan limit decreases to 340 million KRW. Because loan limits shrink when choosing variable rates, the likelihood of selecting fixed rates increases.

According to the Bank of Korea Economic Statistics System, as of last September, 75.2% of new mortgage loans were fixed rate, and 24.8% were variable rate. However, based on outstanding balances, the proportion of variable rate loans (58.6%) remains higher than fixed rate loans (41.4%).

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