"Interest Rate Rise, It's Shocking"... Monthly Interest Increased by 340,000 Won [Issue Analysis]

From the 17th, COFIX Rises Pushing Variable Interest Rates Up
Existing Borrowers' Interest Costs Jump Tens of Thousands of Won After One Year
New Mortgage Borrowers Face Variable Rates Exceeding 5%

On the 17th, a view of apartments from Lotte World Tower Seoul Sky in Songpa-gu, Seoul. The Korea Real Estate Board announced that the actual transaction price index for apartment sales in Seoul in March was 175.1, up 1.4 points from the previous month (173.7). This marks the first time in five months since October last year, when the Seoul apartment sales transaction price index recorded 180.0, that the index has turned upward again. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Sim Nayoung] "In just one year, my monthly interest payment increased from 803,000 won to 1,143,000 won. It's shocking." This is the story of Lee Jeongmi (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%. During the ultra-low interest rate trend caused by the COVID-19 pandemic, the rate dropped to 2.41% in May 2021, and she thought choosing a variable rate was a good decision. However, the situation completely reversed in just one 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.

As interest rates rise, cases of people having to pay tens of thousands of won more in interest each month are increasing. Since the 17th, the monthly interest burden for those who bought homes with variable-rate loans from commercial banks has increased again. This is because the COFIX (Cost of Funds Index) for new loans as of April, announced by the Korea Federation of Banks the day before, was recorded 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 on 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 on deposit products such as actual deposits, savings, and bank bonds handled by the banks. When COFIX rises, it means banks have secured funds by paying more interest than before. Consequently, the variable mortgage interest rates linked to COFIX at commercial banks move accordingly. Borrowers repay their loans by applying the recalculated interest rate 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.

A representative from a commercial bank 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." Since the 17th, the variable interest rates applied to new mortgage loans have exceeded 5%. The new COFIX-linked mortgage 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. During 2020, when the low-interest trend peaked due to the COVID-19 pandemic, most household loans had interest rates in the 1?2% range, but now the trend has completely shifted to 3?4% loans. According to the Bank of Korea, in March, 15.7% of new borrowers at commercial banks had interest rates in the 1?2% range, 48.2% in the 3% range, and 26.7% in the 4% range.

Looking back two years to August 2020, when 89% of loans 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.