Rate Reversal Sends Interest Burden of Variable-Rate Mortgage Holders Soaring
A 'rate reversal' phenomenon has emerged in bank mortgage lending, with variable rates—where interest payments fluctuate with market rates—now exceeding fixed rates, where the initially set rate is maintained. As a result, the interest burden on those who took out variable-rate loans is growing rapidly.
According to the financial industry, as of the 10th, the 6-month variable mortgage rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at 4.38–6.38% per annum. Fixed rates (5-year fixed, then variable) were at 4.38–6.34%, with the upper end 0.04 percentage points lower than variable rates. As recently as the 22nd of last month, fixed rates were still higher. As of that date, the five banks' 5-year fixed mortgage rates were 4.63–6.66% per annum, while 6-month variable rates were 4.41–6.51%—meaning fixed rates were higher by 0.15 and 0.22 percentage points at the upper and lower ends, respectively.
Fixed rates are typically set higher than variable rates to reflect the risk of rising rates, but short- and long-term market rates have recently moved in opposite directions, producing the reversal. Market rates that serve as the benchmark for fixed-rate mortgages are falling, while those underpinning variable rates remain elevated.
According to the Korea Financial Investment Association's Bond Information Center, the 5-year bank bond yield (unsecured, AAA)—the benchmark for fixed-rate mortgages—stood at 4.057% per annum as of the 9th, down 0.247 percentage points from the 22nd of last month (4.304%). This rate peaked at 4.655% on September 15 and has been trending downward since. By contrast, the benchmark for variable rates, COFIX (the Cost of Funds Index), remains at high levels. COFIX based on new lending stood at 3.43% per annum in September, the highest since June 2024 (3.52%).
Those affected by this reversal are borrowers who recently took out loans at variable rates. According to the Bank of Korea, variable-rate loans accounted for 65.8% of new mortgage lending in September. The figure was just 8.5% in September last year, but climbed to 68.1% by July this year. With the structure of variable and fixed rates having flipped this month, borrowers who chose variable rates now face higher rates than those on fixed-rate loans.
