'I wish I could go back six months': Why borrowers with the same loan are paying more interest

A salaried worker surnamed Lee finally achieved his dream of homeownership last April, taking out a 400 million won ($297,000) loan at a variable interest rate. He had wanted to eliminate the risk of rising rates by choosing a fixed rate, but the higher upfront cost gave him pause. He also factored in the possibility that rates could fall further if conditions in the Middle East and broader markets improved.

Six months later, Lee regrets his decision. As market rates climbed and his six-month rate adjustment cycle came due, his loan rate rose — and has now surpassed the fixed-rate option that was available to him when he signed his contract. "If I had known rates would rise this much, I would have chosen a fixed rate from the outset," he said. "I am genuinely worried they could go even higher."

The COFIX — the benchmark rate for variable-rate bank loans — has surged this month, deepening the anxiety of borrowers across the country. Both existing variable-rate borrowers and those rushing to buy real estate are wrestling with whether to choose a variable or fixed-rate product. The Herald Business examined the reasons behind the spike in variable loan rates and what borrowers should consider going forward.

The Korea Federation of Banks announced Thursday that the COFIX based on new loans extended in September came in at 3.43 percent — the highest level since June 2024, when it stood at 3.52 percent, a gap of two years and three months. The figure rose 0.25 percentage points from the previous month, the largest single-month increase since November 2022, when it climbed 0.36 percentage points.

The rise was largely anticipated. The Bank of Korea's Monetary Policy Board raised the benchmark interest rate twice in consecutive months — in July and August — prompting banks to quickly push up deposit rates. Bank time-deposit rates, which had hovered in the high 2 percent range at the start of the year, have since climbed to the low 4 percent range.

COFIX is the weighted average interest rate on funds raised by eight domestic banks, reflecting changes in rates on deposit products such as savings accounts, time deposits and bank bonds. Rising market rates pushed up bank bond yields, time-deposit rates followed suit, and COFIX climbed along with them.

The sharp rise in COFIX means borrowers whose six-month rate adjustment cycle falls on Friday will immediately face a heavier repayment burden.

Variable-rate loans benchmarked to the new-loan COFIX are typically adjusted every six months. With the new-loan COFIX rising from 2.81 percent on April 16 to 3.43 percent on Friday, borrowers who took out loans in mid-April will see their loan rates increase by 0.62 percentage points starting with this adjustment cycle.

For example, a borrower who took out a 400 million won loan on April 16 at an annual rate of 4.7 percent on a 30-year equal principal-and-interest repayment schedule had been paying 2.08 million won a month. From Friday, with the rate adjusted to 5.32 percent annually, that monthly payment rises to 2.226 million won.

As in Lee's case, a significant number of borrowers are likely now paying a higher rate than the fixed-rate option that was available to them when they first took out their loans.

An analysis of April 16 rate data from the four major banks — KB Kookmin, Hana, Woori and NH NongHyup, excluding Shinhan Bank, which does not apply the new-loan COFIX — found that after adding the 0.62 percentage-point adjustment to the lower bound of each bank's variable rate, three of the four banks ended up with adjusted variable rates exceeding the lower bound of their fixed rates on that same date. At the upper bound, one bank's adjusted variable rate surpassed its fixed-rate equivalent, while two of the remaining three banks saw the gap narrow to within 0.1 percentage points — in effect, virtually no difference.

Assuming the same loan amount, borrowers currently on variable rates would likely be paying less each month had they chosen a fixed rate six months ago. Those who went variable have not only ended up with a heavier repayment burden than fixed-rate borrowers from the same period — they also remain exposed to the risk of further rate increases.

A widely held view in financial circles holds that fixed-rate loans are the better choice when rates are rising. Although fixed rates tend to be higher than variable rates — which are benchmarked to COFIX, a lagging indicator, rather than to market-rate bank bonds — they shield borrowers from rate-increase risk by locking in the same rate for the life of the loan. That is also why the government encourages fixed-rate borrowing during periods of rising rates.

In practice, however, fixed-rate loans have struggled to attract borrowers because of their relatively higher rates. As of July 16, the gap between the upper bounds of fixed and variable rates at the four major banks widened to as much as 0.99 percentage points. According to the Bank of Korea, the share of fixed-rate loans among new mortgage loans fell from 94 percent last October to 31.9 percent in July this year.

Given that the Bank of Korea typically adjusts its benchmark interest rate in increments of around 0.25 percentage points, it is hardly surprising that borrowers gravitated toward variable rates when the spread had grown so wide.

Lending experts in the financial sector say the latest COFIX spike marks the start of a full-scale reversal — variable rates striking back.

Year-end typically brings a seasonal uptick in time-deposit and installment-savings sign-ups, and the recent stock market correction is expected to drive even more savers into deposits than usual. A larger deposit base means higher funding costs for banks, which puts upward pressure on COFIX.

Bank bond rates are another variable. Banks facing greater demand for funds amid a push for productive finance have issued more bonds this year than last, and competition among lenders could push funding costs higher still. "The prevailing view is that long-term bond rates have already risen as far as they can go, but short-term COFIX could climb further," an official at one commercial bank said. "There are many uncertainties — the US government's debt problems, inflation, the Middle East conflict, and whether the Bank of Korea will raise rates again."

Lending experts at banks advise borrowers looking to take out a new loan to buy real estate at this stage to consider a fixed-rate product first.

With the gap between the two products narrowing, one approach is to lock in a fixed rate to eliminate rate-increase risk, then reassess after three years — when prepayment penalties are waived — and decide at that point whether to refinance into a variable-rate loan based on prevailing conditions.

The COFIX announcement has already narrowed the spread between fixed and variable upper-bound rates. As of Friday, the maximum gap between fixed and variable upper-bound rates at the four banks stood at 0.57 percentage points, a significant reduction from July 16.

Fixed-rate loans also carry a borrowing-limit advantage under the tiered stress debt service ratio rules, which allow for a higher loan ceiling even when the fixed rate is nominally higher than the variable rate. A simulation at one commercial bank found that a borrower earning 100 million won annually, taking out a 30-year equal principal-and-interest loan, could borrow up to 450 million won on a variable rate (annual rate of 5.1 percent based on the new-loan COFIX). Under a fixed rate (5.5 percent annually based on bank bond rates), the ceiling rose to 516.45 million won — about 66 million won more.

That said, with rates still elevated, experts suggest that borrowers in no rush to buy housing consider watching the market and revisiting a purchase in early next year. New household loan quotas will be assigned to each bank in the first half of next year, and banks may lower rates as a marketing measure to attract borrowers.

"If you need the borrowing room right away, choose a fixed rate and refinance after three years," said Kim Eun-jin, head of Leo Loan Research Institute. "With financial market volatility rising toward year-end, it is worth waiting until next year to draw up a new loan strategy if there is no urgency."

Existing variable-rate borrowers, however, have fewer options. They must weigh prepayment penalties against their outlook for future rates. Banks advise these borrowers to complete the three-year period before prepayment fees are waived before making any move. The average prepayment penalty rate at the five major banks currently stands at around 0.65 percent.

"Even though the gap has narrowed, fixed-rate loans are still more expensive," an official at one bank said. "If you have not yet hit the three-year mark, switching would mean paying the prepayment penalty on top of everything else."