"Monthly Interest on Housing Loans Rises Sharply from 800,000 KRW to 1,140,000 KRW in One Year"

COFIX Rise Pushes Up Variable Interest Rates
Existing Borrowers' Interest Costs Jump Tens of Thousands of Won in One Year

New Mortgage Borrowers Face Variable Rates Exceeding 5%

Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Shim Nayoung] From the 17th, the monthly interest burden for people who bought houses with variable-rate loans from commercial banks will increase again. This is because the COFIX (Cost of Funds Index) based on new loan amounts as of April, announced by the Korea Federation of Banks the day before, was calculated at 1.84%. COFIX, which is the basis for calculating variable interest rates, rose by 0.12 percentage points compared to March.

COFIX is the average interest rate of funds raised by eight domestic banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, Industrial Bank of Korea, SC First, and Korea Citibank). It reflects the interest rates of deposit products such as actual deposits, savings, and bank bonds handled by banks. When COFIX rises, it means banks have secured funds by paying more interest than before. Consequently, the variable interest rates of mortgage loans linked to COFIX at commercial banks move accordingly. Borrowers repay loans by applying the interest rate recalculated based on COFIX every six months. The financial sector expects that if the Bank of Korea raises the base rate again on the 26th of this month, COFIX will rise to 2% within the first half of the year.

As interest rates rise, cases of having to pay tens of thousands of won more in interest monthly are increasing. "Within a year, my monthly interest increased from 803,000 won to 1,143,000 won. It's shocking." This is the story of Lee Jungmi (47, pseudonym), who took out a 400 million won variable-rate mortgage loan two years ago. When she first took out the mortgage loan in May 2020, the interest rate was 2.79%. Thanks to the ultra-low interest rate trend due to the COVID-19 pandemic, when the rate dropped to 2.41% in May 2021, she thought choosing a variable rate was a good decision. However, the situation completely reversed within a year. This month, the variable interest rate applied was 3.43%, which is 1 percentage point higher than a year ago, increasing her monthly interest burden by 340,000 won. If she had chosen a fixed rate, she would have paid 2.9% interest for five years, resulting in a monthly interest payment of 966,000 won.

A commercial bank official said, "At first, fixed rates may seem more expensive when taking out a loan, but during a period of rising interest rates like now, variable rates are much more costly," and advised, "People who need to take out loans in the future should consider this point." From the 17th, the variable interest rates applied to new mortgage loans have exceeded 5% at the maximum. The new COFIX-linked mortgage loan rates are adjusted as follows: KB Kookmin Bank 3.54?5.04%, Woori Bank 3.80?5.01%, Nonghyup Bank 3.29?4.49%, and Shinhan Bank 3.58?4.60%.

The level of household loan interest has risen significantly. While most household loans in 2020, when the low-interest trend peaked due to COVID-19, were in the 1?2% annual interest range, the trend has completely shifted to 3?4% loans now. According to the Bank of Korea, in March, among borrowers who newly borrowed money from commercial banks, 15.7% had interest rates in the 1?2% range, 48.2% in the 3% range, and 26.7% in the 4% range.

Comparing this to August 2020, when 89% were in the 1?2% range, 6.8% in the 3% range, and 2.0% in the 4% range, loan interest has risen significantly, increasing the interest burden. According to the Bank of Korea’s analysis, each 0.25 percentage point increase in the base rate raises the average annual interest burden per person by 164,000 won. A 1 percentage point increase can raise the annual interest burden to as much as 655,000 won.