[DigitalToday reporter Ji-young Lee] The Bank of Korea has raised the base rate twice in a row, but loan rates are moving at different speeds depending on the product. Variable-rate mortgages follow COFIX, while fixed and mixed-rate loans track different benchmarks such as financial debentures. Existing variable-rate borrowers must also wait for their rate reset cycle, creating differences in when base-rate hikes translate into an actual interest burden.

According to the financial sector on Sept. 4, the Bank of Korea's Monetary Policy Board raised the base rate by 0.25 percentage point to 2.75 percent from 2.50 percent on July 16, then lifted it again by 0.25 percentage point to 3.00 percent on Aug. 27. The base rate has risen by a total of 0.50 percentage point in two months.

Household loan rates also rose in July. According to the Bank of Korea, the interest rate on household loans at deposit banks, based on new lending, rose by 0.14 percentage point from the previous month to 4.64 percent. Mortgage loan rates climbed by 0.12 percentage point to 4.48 percent. Among mortgages, fixed-rate loans rose by 0.23 percentage point to 4.76 percent and variable-rate loans increased by 0.08 percentage point to 4.35 percent.

COFIX rises for 4 straight months, reflected in variable-rate mortgages

Even within mortgages, the rise differs between fixed-rate and variable-rate loans because the base rate is not applied directly to individual loan rates. A base-rate adjustment affects short- and long-term market rates and banks' funding costs, then feeds through product-specific benchmarks into loan rates.

A main benchmark for variable-rate mortgages is COFIX. COFIX is a funding cost index calculated based on interest rates on time deposits, installment savings and financial debentures actually raised by 8 domestic banks.

COFIX based on new lending in July was 3.18 percent, up 0.13 percentage point from 3.05 percent in June. It rose for four straight months, from 2.89 percent in April to 2.90 percent in May, 3.05 percent in June and 3.18 percent in July. That is the highest level in 1 year and 7 months since 3.22 percent in December 2024.

The rise in COFIX was reflected in new loans that use it as a benchmark. KB Kookmin Bank raised interest rates on its six-month variable-rate mortgages tied to new COFIX lending by 0.13 percentage point to 4.38 percent to 5.78 percent from 4.25 percent to 5.65 percent from Aug. 19. Woori Bank also adjusted rates on the same basis to 4.69 percent to 5.89 percent from 4.56 percent to 5.76 percent.

Still, it is difficult to make a simple comparison between the increase in COFIX and the increase in the base rate. That is because COFIX reflects rates from multiple funding sources and market rates can pre-price expectations for future monetary policy. COFIX for August, based on this standard, is scheduled to be published on Sept. 15.

Existing borrowers face repricing lag, while fixed-rate loans move first

Even if COFIX is reflected in new variable-rate loans, existing borrowers' rates do not change at the same time. Existing variable-rate loans apply the new COFIX when the repricing cycle set in the contract arrives, so the actual timing of the rate change differs by borrower.

If a borrower is using a six-month variable-rate mortgage, the existing rate can be maintained until the next repricing date even if COFIX rises. When the higher COFIX is applied at the repricing point, the interest burden increases. This is why the timing of when borrowers feel the impact of base-rate hikes differs even among holders of the same type of variable-rate loan, depending on the reset date.

By contrast, fixed-rate mortgages and mixed-rate mortgages that fix the rate for a certain period are mainly influenced by market rates such as financial debentures. Mixed-rate mortgages at the top five banks use the 5-year bank debenture yield as a key benchmark. Long-term market rates such as financial debentures can incorporate expectations for future monetary policy in advance, and may move ahead of actual base-rate changes.

An official at a commercial bank explained, "In an additional rate-hike phase, the financial debenture rate used for fixed-rate mortgages rises first, and then COFIX, the benchmark for variable-rate loans, follows."

The official said many new borrowers choose variable-rate loans because rates are relatively lower for now. "Because the mortgage amount itself is large, customers have a strong tendency to choose a rate type with a smaller immediate principal-and-interest burden," the official said. "Based on recent new mortgages, the selection ratio between variable and fixed is about 9 to 1."

Possibility of further hikes adds upward pressure on loan rates

After raising the base rate twice in a row in July and August, the BOK has also left open the possibility of additional increases. BOK Governor Hyun Song Shin (신현송) said at a press briefing after the Monetary Policy Board meeting on Aug. 27 that the median of the board members' dot plot containing the base-rate outlook for the next six months was 3.25 percent. That is 0.25 percentage point above the current base rate.

Shin said of the four Monetary Policy Board meetings scheduled over the next six months, "About one more increase from now," and explained that he expects a gradual pace of increases.

Hana Securities said attention should be on the terminal rate level rather than the timing of additional hikes in the future monetary policy path. It forecast the base rate would rise to 3.50 percent after additional increases in November and next February, and judged that the bond market has not sufficiently reflected that terminal rate level.

If the bond market further prices in such a terminal rate outlook and market rates rise, upward pressure could persist on rates for fixed and mixed-rate mortgages that use financial debentures as benchmarks. Variable-rate loans could also be affected with a lag through banks' funding costs and COFIX.

Ultimately, the timing and magnitude of base-rate increases reflected in loan rates differ by product. Many new borrowers choose variable-rate loans because rates are relatively lower now, but if COFIX continues to rise and the possibility of additional base-rate hikes persists, the interest burden on existing variable-rate borrowers could also increase sequentially depending on their repricing date.

Banks explain that existing variable-rate borrowers should consider not only the rate gap but also early repayment fees when reviewing whether to refinance after rates rise.

A commercial bank official said, "If rates rise, you can calculate whether it is better to keep the existing loan or switch to another product, considering early repayment fees and other factors." The official added, "New borrowers also need to choose the rate type by considering their repayment capacity and the possibility of future rate fluctuations."