The share of fixed-rate mortgages among new home loans in South Korea has fallen to its lowest level in 12 years and five months, as borrowers shift toward variable-rate loans that currently carry lower rates.
According to the Bank of Korea's July report on weighted average interest rates at financial institutions, released on the 26th, fixed-rate loans accounted for 31.9% of newly extended mortgages in July, down 5.8 percentage points from the previous month. That is the lowest level since February 2014, when the share stood at 31.8%. Across all household loans, the fixed-rate share fell 1.7 percentage points from a month earlier to 21.0%, the lowest in four years and two months, since the 20.7% recorded in May 2022.
Behind the shift is a widening gap between fixed and variable rates. In July, the fixed-rate mortgage rate rose 0.23 percentage point from the previous month to 4.76% a year, while the variable rate edged up just 0.08 percentage point to 4.35%. That widened the gap between the two to 0.41 percentage point.
Kim Seong-jun, head of the Bank of Korea's financial statistics team, said of the declining fixed-rate share: "Because fixed rates are higher than variable rates right now, consumers appear to be choosing the cheaper rate for the moment." Kim added that fixed and variable shares have risen and fallen in the past, so the trend bears further watching. On an outstanding-balance basis, the fixed-rate share remains at 62.4%, indicating that the preference for variable rates is becoming pronounced mainly among new loans.
The unusually sharp rise in fixed rates stems from differences in benchmark rates. The Bank of Korea cited increases in benchmark rates, such as the yield on five-year bank bonds, and in fixed-rate loan rates as the main factors. The five-year bank bond yield rose to 4.39% in July from the previous month, and the Cost of Funds Index (COFIX) for newly handled loans also climbed 0.13 percentage point to 3.18%.
As a result, the rate on new household loans at deposit-taking banks rose 0.14 percentage point from the previous month to 4.64% a year in July. The mortgage rate rose 0.12 percentage point to 4.48% a year, while the rate on general unsecured personal loans jumped 0.25 percentage point to 5.97%, the highest level since December 2024, when it stood at 6.15%.
The concern is that with the fixed-rate share shrinking and the variable-rate share growing, borrowers could face heavier interest burdens if market rates rise. When the gap between fixed and variable rates is as wide as it is now, borrowers have a greater incentive to choose variable-rate loans with lower initial rates, raising concerns that this could increase household vulnerability during a period of rising rates.
Corporate loan rates, by contrast, declined. The corporate loan rate fell 0.07 percentage point from the previous month to 4.20% in July. The main driver was a drop in the rate on loans to small and medium-sized enterprises, to 4.22% from 4.38%, attributed to preferential-rate support aimed at expanding corporate lending and to greater availability of low-rate loans.
