The share of fixed-rate loans in South Korea’s mortgage market has fallen to its lowest level in 12 years and 5 months. As fixed-rate mortgage rates climb faster than variable rates, borrowers are increasingly flocking to relatively cheaper variable-rate products.

According to the “July Weighted Average Interest Rates of Financial Institutions” released by the Bank of Korea on the 26th, fixed-rate loans accounted for 31.9% of newly issued mortgages in July, down 5.8 percentage points from the previous month. This marks the lowest level since February 2014 (31.8%). Compared with October last year, when the fixed-rate share reached 94%, the figure has plummeted by 62.1 percentage points in just nine months.

Even when broadening the scope to all household loans, the fixed-rate share fell to 21.0%, down 1.7 percentage points from the previous month—the lowest since May 2022 (20.7%) and a 4-year, 2-month low. However, on a balance basis, fixed-rate loans still account for 62.4%, suggesting that the preference for variable rates is most pronounced among new lending.

The widening rate gap between fixed and variable products lies at the heart of this shift. In July, fixed-rate mortgage rates jumped 0.23 percentage points from the previous month to 4.76% per annum, while variable-rate mortgages rose only 0.08 percentage points to 4.35%. The spread between the two widened to 0.41 percentage points. At commercial banks, the gap is even larger in actual lending practice. As of the reference date, Bank A’s fixed-rate mortgages ranged from 5.16% to 6.56% per annum, while variable rates ranged from 4.38% to 5.78%—a difference of 0.78 percentage points at the lower end.

The faster rise in fixed rates stems from structural differences in benchmark rate mechanisms. Fixed rates use the 5-year bank bond as their benchmark, immediately reflecting forward-looking expectations for base rates, inflation, and government bond yields over the next five years. Variable rates, by contrast, are based on COFIX (Cost of Funds Index), which averages funding costs over a one-month period and reflects changes with a time lag. Indeed, the 5-year bank bond yield rose to 4.39% in July from the previous month, while COFIX based on new business volume also climbed 0.13 percentage points to 3.18%.

Kim Sung-joon, head of the Bank of Korea’s financial statistics team, explained the decline in fixed-rate share: “Since fixed rates are currently higher than variable rates, consumers appear to be choosing the cheaper option for now.” He added that past trends have shown fluctuations in fixed-versus-variable rate shares, so the trajectory warrants further observation.

Lower prepayment penalty burdens and the normalization of loan refinancing are also seen as factors encouraging variable-rate selection. A commercial bank official noted, “Prepayment penalty rates have come down compared with the past, and since they no longer apply after three years, most borrowers tend to choose variable rates with lower interest, thinking they can refinance at any time.”

Overall household loan rates in July rose 0.14 percentage points from the previous month (4.50%) to 4.64% per annum. Mortgage rates climbed 0.12 percentage points to 4.48% per annum, the highest since November 2023 (4.48%). Unsecured credit loan rates jumped 0.25 percentage points to 5.97%, the highest level since December 2024 (6.15%).

Savings deposit rates (based on new business volume), including time deposits and installment savings, rose 0.13 percentage points from the previous month (3.08%) to 3.21% per annum, extending their upward streak to four consecutive months since April. As deposit rates climbed, the loan-deposit spread narrowed 0.17 percentage points to 1.06%, marking a sixth straight month of decline.

The concern is that with the fixed-rate share shrinking and variable-rate share growing, borrowers could face heavier interest burdens if market rates rise in the future. Particularly in the current environment of a wide fixed-variable rate gap, borrowers have greater incentive to choose variable-rate products with lower initial rates—a dynamic that could amplify household vulnerability during a rising-rate cycle.

Meanwhile, unlike household loans, corporate loan rates trended downward. Corporate lending rates in July fell 0.07 percentage points from the previous month to 4.20%. This was largely driven by a decline in small and medium-sized enterprise loan rates from 4.38% to 4.22%, attributed to preferential rate support for corporate credit expansion and increased low-rate lending.