[Interest Rate Response Strategy]② Yeongkkeuljok Feel Interest Rate Drop Only After Half a Year

Interest Rates Drop Within 1-2 Weeks, Applies Only to New Borrowers
Variable Mortgage Rates Reflect COFIX and Change After 6 Months

"I've seen many articles saying loan interest rates have dropped recently... So why has my rate gone up?"

Mr. Kim Juwon (42), who borrowed 480 million KRW when buying an apartment in Seongdong-gu, Seoul two years ago, felt a chill in his heart upon receiving a text message on the 25th about his variable-rate mortgage loan. The mortgage interest rate he had been paying at 4.23% since last July surged to 6.14% in just six months. As the rate rose, his monthly interest payment increased by more than 500,000 KRW. Kim sighed, saying, "Who exactly are these people whose loan rates have dropped? To afford the increased interest, I might have to save on gas and not even turn on the boiler during this cold snap."

A 'Distant Story' for Existing 'Yeongkkeul' Borrowers

Although commercial banks have started lowering loan interest rates this month, it remains a distant story for existing 'Yeongkkeul' borrowers like Mr. Kim. The rate cuts made in the past one to two weeks apply only to new borrowers. For example, mortgage rates were at 7% in December last year but dropped to 6% in January this year, meaning those who took out loans a month later could reduce their interest costs. The banking sector explained, "Assuming the current trend of steadily falling rates continues, existing borrowers will likely feel the impact of rate cuts only in the second half of this year."

The reason lies in the structure of variable mortgage rates. Variable mortgage rates reflect the COFIX (Cost of Funds Index) and are adjusted once every six months. COFIX is the weighted average interest rate of funds raised by eight domestic banks. It moves in the same direction as deposit and savings rates and bank bond yields, which are the banks' funding sources.

[Image source=Yonhap News]

Until mid-November last year, deposit rates surged dramatically, pushing COFIX to a record high of 4.34% in December. Compared to June last year (1.98%), it rose by 2.36 percentage points in just half a year. This increase directly affects consumers' loan interest rates. The approximately 2 percentage point rise in Mr. Kim's loan rate also reflects this COFIX increase.

An official from Bank A said, "Under the assumption that COFIX continues to decline, those who had their variable rates reset in December last year will see their rates drop only by June this year. Since COFIX started rising significantly after September last year, existing borrowers whose variable rate adjustment cycle falls within the first quarter of this year will likely feel their rates have increased compared to before."

For New Borrowers, Which Is Better: Fixed or Variable Rate?

For borrowers seeking new loans, which is more advantageous: fixed or variable interest rates? Since late November last year, as bank bond yields declined sharply, fixed mortgage rates became more than 1 percentage point cheaper than variable rates, drawing attention. The atmosphere at bank branches at the end of the year was "everyone chooses fixed rates." However, with the recent clear downward trend in rates, variable rates are regaining interest.

An official from Bank B explained, "With market interest rates falling, loan rates are likely to decrease for the time being, making variable rates more favorable now. Also, when refinancing from variable to fixed rates, there is no early repayment penalty, so if rates rise again, quickly switching to fixed rates is a strategy worth considering."

[Image source=Yonhap News]

Among loan products with rates lower than market rates is the Special BoGeumjari Loan from the Korea Housing Finance Corporation, launching on the 30th. This product temporarily combines the Safe Conversion Loan and Qualified Loan for one year to reduce interest rate fluctuation risks. For homes priced at 900 million KRW or less, applications can be made up to 500 million KRW without income restrictions.

For the general type with no income restrictions and home prices under 900 million KRW, interest rates range from 4.25% to 4.55% annually. For the preferential type, applicable to homes priced at 600 million KRW or less and incomes under 100 million KRW, rates are 0.1 percentage points lower, ranging from 4.15% to 4.45% annually.

It is also advantageous in terms of loan limits. When borrowing from commercial banks, there is a limit set by the Debt Service Ratio (DSR) of 40%. However, this regulation does not apply to the Special BoGeumjari Loan. Instead, a Debt-to-Income ratio (DTI) of 60% is applied. DSR calculates loan limits including principal repayments of mortgage loans and other credit loans, whereas DTI excludes credit loan principal when calculating limits.

An official from Bank C explained, "For those who already have credit loans, choosing the Special BoGeumjari Loan means a higher loan limit. For example, assuming a salaried worker earning 70 million KRW annually with a 50 million KRW credit loan (6% interest) purchases a 900 million KRW apartment (4% interest, 30-year term), the Special BoGeumjari Loan allows borrowing up to 500 million KRW, whereas commercial banks would only allow up to 260 million KRW."