Korea Bank Rates: Deposit Rates Fall, Loan Rates Rise (Feb 2024)

The landscape of personal finance in South Korea is experiencing a peculiar divergence: while deposit rates are trending downwards, mortgage rates are steadily climbing. This unusual dynamic, observed as of February 19, 2026, is creating a challenging environment for both borrowers and savers, driven by a complex interplay of factors including regulatory policies, market expectations and global economic conditions. Understanding this shift requires a closer look at the key indicators influencing the Korean financial market, particularly the Cost of Funds Index (COFIX), and its implications for homeowners and prospective buyers.

The recent trend is particularly noticeable when examining the COFIX, a benchmark used to determine the interest rates on variable-rate mortgages. After a four-month consecutive rise, the COFIX experienced a slight dip in January, falling to 2.77% from 2.89% the previous month – a decrease of 0.12 percentage points. This marks the first decline in five months. However, this decrease in COFIX doesn’t necessarily translate to lower borrowing costs, as other market forces are pushing mortgage rates upwards. The core issue lies in the fact that while deposit rates, which heavily influence COFIX, are decreasing, the overall expectation of stable or rising market interest rates is counteracting this effect.

COFIX Decline and the Shifting Deposit Rate Landscape

The January decline in COFIX is directly linked to a reduction in bank deposit rates. In January, NH NongHyup Bank lowered the maximum interest rate on its one-year fixed-term deposits from 3% to 2.9%, effectively eliminating 3% interest rates across the five major Korean banks – KB, Shinhan, Hana, Woori, and NH NongHyup. This reduction in deposit rates, representing the cost of funds for banks, contributed to the COFIX decrease. According to banking sources, the lower demand for funds at the end of the year prompted banks to lower deposit rates, impacting the COFIX calculation. The COFIX is weighted with approximately 70% based on these deposit rates, making it sensitive to changes in savings account yields.

However, the typical relationship between falling deposit rates and lower lending rates isn’t holding true in the current market. Despite the COFIX dip, mortgage rates are on the rise. Data from February 19th shows that variable-rate mortgage rates offered by the five major banks ranged from 3.65% to 6.05%, up from 3.77% to 5.87% the previous month. Fixed-rate mortgage rates have similarly seen an increase, moving from a range of 3.91% to 6.21% to 4.18% to 6.78% over the same period. This divergence highlights the influence of factors beyond just the COFIX on mortgage pricing.

Market Interest Rate Pressures and the Role of Government Bonds

The primary driver behind the rising mortgage rates is the expectation of stable or increasing market interest rates. The yield on South Korea’s three-year government bonds rose from 2.950% at the end of last year to 3.140% on February 13, 2026. Similarly, the five-year government bond yield, which serves as a benchmark for fixed-rate mortgage products, increased from 3.499% to 3.687% during the same period. These increases in government bond yields directly translate to higher borrowing costs for banks, which are then passed on to consumers in the form of increased mortgage rates. Seoul Finance reports that this trend is expected to continue as long as market interest rates remain elevated.

Banks are also factoring in the possibility of further interest rate hikes by the U.S. Federal Reserve. This global economic uncertainty adds to the upward pressure on Korean interest rates. Banks have limited incentive to aggressively compete for deposits, as the demand for loans is not particularly strong. This lack of competition allows them to maintain higher lending margins, contributing to the rising mortgage rates. As one banking source noted, the limited competition for funds suggests that COFIX volatility will likely remain constrained.

Government Intervention and Long-Term Fixed-Rate Mortgages

In response to the rapidly increasing mortgage rates, South Korean financial authorities are considering the introduction of ultra-long-term fixed-rate mortgage products with terms of up to 30 years. Currently, most fixed-rate mortgages in South Korea are structured with a five-year fixed-rate period followed by a transition to a variable rate or a re-fixing of the rate every five years. The proposed long-term fixed-rate mortgages aim to provide borrowers with greater stability and predictability in their housing costs. This move reflects a growing concern about the affordability of housing in South Korea, particularly as interest rates continue to rise.

However, the implementation of such long-term fixed-rate mortgages presents challenges. Banks may be hesitant to offer these products due to the increased interest rate risk they would bear. To mitigate this risk, the government may need to provide incentives or guarantees to encourage banks to participate. The success of this initiative will depend on the government’s ability to create a favorable environment for both lenders and borrowers.

Key Takeaways

• Diverging Trends: Deposit rates are falling, while mortgage rates are rising in South Korea.
• COFIX Impact: The COFIX, a key benchmark for mortgage rates, has recently declined due to lower deposit rates, but this hasn’t translated into lower borrowing costs.
• Market Forces: Rising government bond yields and expectations of further U.S. Federal Reserve rate hikes are driving up mortgage rates.
• Government Response: Financial authorities are considering introducing ultra-long-term fixed-rate mortgages to provide greater stability for borrowers.

The current situation presents a complex challenge for South Korean homeowners and prospective buyers. While the decrease in COFIX offers a slight reprieve, the overall trend of rising mortgage rates is likely to continue in the near term. The government’s proposed long-term fixed-rate mortgages could offer a solution for some borrowers, but their success will depend on careful implementation and collaboration between the government and the banking sector. The Bank of Korea’s next monetary policy meeting, scheduled for [Date of next meeting – needs verification], will be closely watched for any signals regarding future interest rate adjustments.

As the situation evolves, staying informed about the latest developments in the Korean financial market is crucial. Readers are encouraged to share their thoughts and experiences in the comments section below and to share this article with anyone who may find it helpful.