Base Rate Hikes: When and How Loan Rates Change =============================================== A base rate hike does not apply immediately to existing loans. The actual timing and size of the change depend on the benchmark rate, the 3-, 6-, or 12-month reset cycle, whether the rate is fixed, and preferential terms. - Loan rates are set by adding a spread to the benchmark rate and subtracting preferential rate discounts. - Rates on variable-rate loans change according to the 3-, 6-, or 12-month reset cycle specified in the contract. - Hybrid loans are affected by the benchmark rate in effect after the fixed-rate period ends. - In principle, fully fixed-rate loans do not reflect market rate changes until the agreed maturity date. - To determine why a rate changed, check the contractual benchmark and preferential terms before the base rate. An increase in the base rate does not mean that existing loan rates will rise immediately. Variable rates change according to benchmarks such as COFIX and bank bond yields and their 3-, 6-, or 12-month repricing cycles, while fully fixed rates are generally maintained until maturity. Reference point: Check the latest figures in the Bank of Korea’s “Base Rate History” and the Korea Federation of Banks Consumer Portal’s “COFIX Disclosures” Loan Rate Formula Loan rates are determined by combining a benchmark rate with the contract terms. The basic structure can be expressed using the formula below. The base rate may not enter this formula directly. Instead, it indirectly affects the benchmark rate. Loan rate = benchmark rate + spread - preferential rate Component Meaning Factors affecting the rate Benchmark rate A reference reflecting the bank’s funding costs COFIX, bank bonds, CDs, KORIBOR, etc. Spread A rate reflecting risks and costs specific to the borrower and product Creditworthiness, collateral, loan type, operating costs, etc. Preferential rate A discount applied when transaction requirements are met Salary deposits, card spending, automatic transfers, etc. Even if the benchmark rate falls, the final rate may decline by less. This is because an increase in the spread can offset the decline in the benchmark. The applicable rate may also rise if preferential terms are lost. Therefore, it is difficult to predict interest costs based only on the direction of the base rate. How the Base Rate Is Transmitted to Loans Changes in the base rate are transmitted to loans through financial markets. A Bank of Korea decision does not apply to every loan the next day. Market rates and product-specific benchmarks move first. They are then reflected in existing loans on the contractually specified repricing date. The Bank of Korea changes the base rate. Market rates such as the call rate, CDs, and bank bond yields respond. Banks’ funding costs change. Loan benchmarks such as COFIX or bank bond yields change. The new rate is applied on the repricing date specified in the contract. COFIX is published by the Korea Federation of Banks at 3 p.m. on the 15th of each month. Bank bond yields are formed daily in the bond market. The actual application date must follow the terms of each loan agreement. Official definitions and the base rate history are available from the Bank of Korea. The latest COFIX is available from the Korea Federation of Banks Consumer Portal. The loan agreement and the bank’s guidance govern which benchmark applies to each product. Comparison of Rate Adjustments by Loan Type Different types of loans track different benchmarks. Even loans taken out on the same day may experience different rate movements. The information below describes the general structure. The exact terms must be checked in the contract. Loan type Commonly used benchmark How it is reflected When to check Variable-rate mortgage COFIX Latest contractually specified benchmark applied at repricing Every 3, 6, or 12 months Hybrid-rate mortgage 5-year bank bond yield, etc. Converts to a variable rate after the fixed-rate period End date of the fixed-rate period Fully fixed-rate loan Bank bond yield at origination, etc. Contracted rate generally maintained until maturity Whether preferential terms have changed Unsecured personal loan 6-month or 1-year bank bond yield, CD, KORIBOR, etc. Changes in short-term benchmarks reflected at repricing Contractual adjustment cycle Jeonse loan COFIX or 6-month bank bond yield, etc. Reflected differently depending on the bank and product Benchmark and cycle specified in the agreement A loan priced using bank bond yields is not necessarily variable-rate. Bank bond yields are also used to calculate fixed rates when a loan is originated. Whether the rate is recalculated after origination is a separate issue. You must also review the rate application method in the contract. Summary by Contract Terms Whether your current loan rate will rise can be determined by examining the rate type and repricing date. Checking only whether the base rate has increased is not enough. Find the item below that applies to your contract. Contract terms Expected impact Variable-rate with an approaching repricing date Recent changes in the applicable benchmark may soon be reflected Variable-rate with substantial time remaining until repricing Existing rate may be maintained until the repricing date Hybrid-rate with time remaining in the fixed-rate period Benchmark changes are generally not reflected during the fixed-rate period Hybrid-rate with an approaching conversion date Rate may change based on the benchmark at the time of conversion Fully fixed-rate with preferential terms maintained Market-rate increases are generally not reflected in the contracted rate Preferential terms are not met Final rate may rise regardless of the benchmark Contract allows the spread to be repriced Rate may change by a different amount from the benchmark Do not rely only on a product being labeled “fixed-rate.” It may be a hybrid-rate product fixed only for a certain period. Check the fixed-rate end date and the benchmark applied afterward. Also review the requirements for maintaining the preferential rate. Calculation Example: Change in a 6-Month Variable Rate A 6-month variable rate reapplies the contractual benchmark every six months. Let the change in the benchmark be Δ%p. If the spread and preferential rate remain the same, the calculation is simple. The new loan rate changes by Δ%p from the previous rate. Rate before repricing = existing benchmark + spread - preferential rate Rate after repricing = existing benchmark + Δ%p + spread - preferential rate Rate change = Δ%p Assuming the outstanding principal remains the same, the change in monthly interest can also be calculated. Δ is measured in percentage points, not percent. Calculating the monthly payment for an equal principal-and-interest repayment loan requires a separate amortization formula. Change in monthly interest ≈ outstanding principal × (Δ ÷ 100) ÷ 12 months This calculation assumes that the spread and preferential rate remain unchanged. If the preferential terms change, the size of the change will also differ. The actual amount billed should be checked against the bank’s repayment schedule. Contract Terms to Check Before the Base Rate The most accurate way to predict your loan’s next rate is to review the loan agreement. In particular, an item labeled “base rate” may mean something different from the Bank of Korea’s rate. It often refers to a loan benchmark designated by the bank. Review the contract terms in the following order. Check whether the rate application method is variable. If it is a hybrid rate, find the end date of the fixed-rate period. Confirm the exact name of the applicable benchmark. If it is COFIX, confirm the specific type. Find the rate repricing cycle and the next adjustment date. Check the conditions under which the spread may change. Review preferential terms such as salary deposits. Compare each item in the rate notices before and after the change. COFIX has several different calculation types. Even if their names are similar, their figures and movements may not be the same. You must look up the exact COFIX type stated in the contract. Comparing it with the disclosed figure for another type can lead to an incorrect conclusion. Common Mistakes When interpreting changes in loan rates, it is easy to confuse the base rate with the benchmark rate. You should also not attribute a rate increase to a single factor without verification. Compare the previous and new values for each item in the notice. Common assumption What to check in practice If the base rate rises, interest rises the next day The existing rate may remain in place until the repricing date If the base rate is held steady, the loan rate also stays the same Bank bond yields, COFIX, and spreads may move separately A fixed rate remains the same in every case Check whether it is a hybrid rate and whether preferential terms have been lost If COFIX falls, the loan rate falls by the same amount Changes in the spread and preferential rate must also be considered All jeonse loans use the same benchmark COFIX or bank bond yields may be used depending on the bank and product A bank bond yield reported in the news applies immediately It is reflected only when the contractual benchmark and repricing date align A reduction in the base rate is transmitted according to the same principles. However, the market may have anticipated the reduction in advance. In that case, bank bond yields may move before the decision. The base rate and loan rates may temporarily move in different directions. How to Check the Latest Base Rate and COFIX The latest figures should be checked together with their official publication dates. An undated statement such as “increased for two consecutive months” cannot be assumed to describe the current situation. Check the decision date in the Bank of Korea’s base rate history. Check the COFIX for the relevant month through the Korea Federation of Banks. Bank of Korea: Base rate history and change dates under monetary policy Korea Federation of Banks Consumer Portal: Monthly COFIX figures and types Loan agreement: Applicable benchmark and repricing cycle Bank rate notice: Changes to spreads and preferential rates The reference date for a market disclosure may differ from that of your contract. Do not assume that the latest published figure applies immediately. Check which published figure will be used on the next repricing date. Frequently Asked Questions If the base rate rises, does a variable rate rise by the same amount? It does not always rise by the same amount. The movement in the contractual benchmark is reflected first. Changes in the spread and preferential rate also affect the final rate. Are existing fixed-rate loans also affected? For fully fixed-rate loans, the contracted rate is generally maintained until maturity. However, a hybrid-rate loan converts to a variable rate after the fixed-rate period. You should also check whether preferential terms have been lost. Does the loan rate change immediately on the COFIX publication date? Existing loans generally change on the contractually specified repricing date. The publication date and actual application date may differ. Check the rate adjustment date in the contract. Can the loan rate rise even if the base rate is held steady? Yes. Bank bond yields and COFIX move according to market conditions. An increase in the spread or a reduction in the preferential rate may also be the cause. Where can I find my loan’s benchmark? Check the rate application section of the loan agreement. It may also be displayed on the loan details screen in the bank’s app. If it is difficult to find, ask the bank for the name of the benchmark and the next repricing date. FAQ Q. When the base rate rises, does the variable loan rate also rise by the same amount? A. It does not always rise by the same amount. The final rate is determined by adding changes in the spread and preferential rate to the amount by which the contractually specified COFIX or bank bond rate has moved. Q. Does the interest on a loan increase starting the day after a base rate hike? A. Existing loans generally do not change immediately. The new benchmark is applied only when the 3-, 6-, or 12-month repricing date specified in the contract arrives. Q. Are fixed-rate loans unaffected by increases in the base rate? A. In principle, a fully fixed-rate loan maintains the agreed rate until maturity. A hybrid-rate loan converts to a variable rate after the fixed-rate period ends, so it is affected by the benchmark at that time. Q. Can loan rates rise even if the base rate is held steady? A. Yes. Bank bond rates and COFIX may rise independently, or the spread may increase. The final rate may also rise if you fail to meet the conditions for a preferential rate. Q. When COFIX is announced, is it applied immediately to existing mortgage loans? A. Publication and application are separate. For existing loans, the applicable COFIX is reflected according to the agreed repricing date and reference date. Q. Where can I check which benchmark my loan tracks? A. Check your loan agreement and the loan details screen in your bank's app. You should look for the benchmark name, the specific COFIX type, the repricing frequency, and the next rate change date. Sources - Bank of Korea Base Rate Trends: https://www.bok.or.kr/portal/singl/baseRate/progress.do?dataSeCd=01&menuNo=200643 - Korea Federation of Banks Consumer Portal COFIX Disclosure: https://portal.kfb.or.kr/compare/cofix.php Images - Woman reviewing an interest rate document with a bank adviser: https://injoys.com/rails/active_storage/blobs/proxy/eyJfcmFpbHMiOnsiZGF0YSI6MTc0NjUsInB1ciI6ImJsb2JfaWQifX0=--d7f8d2975866d531cf9566cff3ea9c98c0dc10ea/ai-767afa4b.webp - Bank, rising graph, calendar, mortgage document, and three interest-rate adjustment charts: https://injoys.com/rails/active_storage/blobs/proxy/eyJfcmFpbHMiOnsiZGF0YSI6MTc0NzEsInB1ciI6ImJsb2JfaWQifX0=--6f9f5cdc4ff25874acdcc433070f643ecbbabb5e/ai-6764e3b8.webp --- Category: Knowledge Base Source: https://injoys.com/en/articles/base-rate-loan-rate-reset-timing License: cc_by Translation-Status: reviewed