"Interest Rates Dropped?"... When Will the Decline in Mortgage Loan Rates Be Felt?

Interest Rate Control Lowers Variable Rates from the 16th

Existing Yeongkkeul Borrowers Will Feel the Reduction Only After Six Months

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] On the 16th, the variable interest rates on mortgage loans at commercial banks dropped by 0.47 percentage points compared to the previous day. The variable mortgage loan interest rates (as of the 16th) at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 4.32% to 6.42%. This was thanks to the COFIX (Cost of Funds Index), the benchmark for banks' variable interest rates, falling from 4.29% in January to 3.82% this month. A representative from a commercial bank said, "The interest rate level is similar to that of last October," adding, "Compared to the upper limit of the variable interest rate rising to 8% in January, it has dropped sharply in a short period."

The reason for the decline in COFIX is that financial authorities have lowered deposit and savings interest rates since November last year to prevent funds from concentrating excessively in banks. The stabilization of the bond market, which led to a drop in bank bond yields, also contributed. COFIX is the weighted average interest rate of funds raised by eight domestic banks. It reflects changes in banks' deposit, savings, and bank bond interest rates. When COFIX falls, the cost for banks to raise funds decreases, which in turn lowers loan interest rates. Conversely, when COFIX rises, the opposite occurs.

The problem lies in the perception speed. People still feel that interest rates are high due to the time lag in applying the rates. For those buying new homes, comparing last month's and this month's rates clearly shows a decrease, but it is different for existing borrowers who have maximized their loans. This is because variable interest rates are adjusted every six months.

For example, borrowers who had their rates adjusted in August last year will receive new rate notifications this month. Although the February COFIX (3.82%) is lower than the previous month, it is still 1 percentage point higher than the August COFIX (2.9%) last year. In this case, the variable interest rate applied from this month will be at least 1 percentage point higher than six months ago for these borrowers.

Another commercial bank official said, "Overall, it takes about half a year for borrowers who maximized their loans to feel the interest rate reduction," adding, "Those who had their rates set when COFIX peaked in December last year will need time until June this year, when the new rates are applied, to feel the rate cuts."

On the deposit side, as interest rates have fallen, the benefits for the public have clearly decreased. The main fixed deposit products at the five major banks have all dropped to the 3% range. Accordingly, the fixed deposit balances at the five major banks decreased by 6.2 trillion won during January alone.

The Financial Supervisory Service (FSS) plans to firmly quell the controversy over banks' "interest profiteering" with this opportunity. Through the '2023 Inspection Operation Plan,' the FSS defined the recent record-high profits made by banks as "unreasonable practices taking advantage of increased market volatility." Accordingly, they stated, "We will inspect whether unreasonable loan interest rates and fees are being charged and the appropriateness of the operation of the right to request interest rate reductions."