A rate cut does not set a new rate for every loan
Imagine two borrowers who both start at 4% a year. One agrees to keep that rate for three years. The other agrees to have it recalculated every six months. The first has a fixed rate; the second has a variable rate. “A year” describes the period used to express the percentage, rather than the dates when bills arrive.
After the central bank cuts its policy rate, the first borrower still pays the rate promised for the fixed period. The other waits for the next reset date, the day the loan rate is recalculated. The agreement names a starting number, called an index or benchmark, and other amounts to add or subtract. Those terms determine the new rate. The policy announcement alone does not tell either borrower the next bill.
Scroll wide tables sideways. Keyboard: focus the table, then use the arrow keys.
| Loan type | What happens to the existing rate? | Useful date or term |
|---|---|---|
| Fixed rate | The agreed rate normally stays unchanged during the fixed period. | When the fixed period ends |
| Variable rate | The rate follows the contract's adjustment rules. | Benchmark, reset date and any limits |
| Fixed, then variable | The fixed period ends before the variable formula starts. | Switch date and the formula used afterwards |
In the US, adjustable mortgages can use an index plus a margin—the extra rate added to that index—with limits on how much the rate can change. The CFPB describes those adjustment terms. Loans elsewhere may follow different rules, so check the formula in your own agreement.
Some Korean variable-rate loans use COFIX, an index reflecting what banks pay to obtain the money they lend. It is a different measure from the Bank of Korea's policy rate. The Financial Services Commission's COFIX explanation on Korea Policy Briefing (Korean) discusses that funding-cost basis. The benchmark's full name and the reset schedule in your agreement determine how that index enters your loan rate.
The lender may add an extra amount to the reference rate, called a margin, and subtract a discount when you meet stated conditions. Those parts can change too. If the reference rate falls by 0.25 percentage points but a 0.20-point discount ends, the final rate falls by only 0.05 points, with everything else unchanged. A percentage point is the difference found by subtracting one percentage rate from another. The rate notice should show each part.
When the rate resets and when you pay
Suppose the variable loan resets on 1 January and 1 July, with no changes between those dates. A policy cut in May does not automatically enter the June interest calculation. The July reset uses the benchmark specified by the contract; it does not simply subtract May's policy cut from the old loan rate.
The payment date is when you pay the amount already calculated. If the rate changes partway through a billing period, the bill may include days at both rates. The CFPB's guide to adjustment terms also distinguishes a rate adjustment from payment recalculation. Check the stated rate and start date instead of trying to infer an annual rate from one debit.
What a 0.25-point cut saves on the actual loan
Suppose a borrower still owes KRW 100 million, or 100 million South Korean won. During this example they pay only interest; the amount owed stays unchanged. The bank confirms that the loan’s annual rate falls from 4.00% to 3.75%. We can now calculate the smaller interest bill. These are invented contract terms, not current offers or a calculation that substitutes a policy rate for a loan rate.
If each rate applied for a whole year, 4.00% would cost KRW 4 million and 3.75% would cost KRW 3.75 million. The difference is KRW 250,000. Subtracting the two rate numbers gives 0.25 percentage points; divide that by 100 to use 0.0025 in a multiplication.
Approximate interest saving = outstanding balance Ă— actual annual rate reduction Ă— time in years
KRW 100,000,000 Ă— 0.0025 Ă— 1 = KRW 250,000 for a full year
Dividing that annual difference by 12 gives about KRW 20,833 per month. It is a simple monthly average. If the lower rate applies for only three months, the same simplified calculation gives KRW 250,000 Ă— 3/12 = KRW 62,500. The contract's rules for counting the days in each interest period determine the exact interest, so the amount need not equal the average.
Repaying principal reduces the amount on which you save interest. If the balance falls from KRW 100 million to KRW 90 million, the same rate reduction produces a smaller saving. Monthly repayments also include principal and depend on the remaining term and payment formula. The KRW 20,833 average therefore cannot simply be deducted from every borrower's monthly payment.
A new loan offer can change while an existing contract is waiting for its reset date. The lender still has to fund the loan and assess that borrower. An advert does not change the terms of the old agreement or establish the rate a customer would qualify for after switching.
Switching loans has an initial cost
Keep the unchanged KRW 100 million balance and assume another loan is 0.25 points cheaper. If all switching costs total KRW 300,000, the first year's KRW 250,000 interest saving is smaller than the initial bill: the costs exceed the saving by KRW 50,000.
If the monthly saving stays the same, you recover the initial cost after a simplified break-even time of 300,000 Ă· (250,000/12) = 14.4 months.
Paying off the loan sooner would leave less time to recover the cost. Early-repayment charges, the new contract's conditions and reductions in the balance also affect the calculation. If you switch from a fixed rate to a variable one, the assumed rate gap may change. The example shows how to compare the costs; it does not establish whether replacing an existing loan with a new one suits a particular borrower.
When does a saver start receiving less?
A fixed-rate term deposit normally keeps its agreed rate until maturity, the date the agreed saving period ends. A policy cut does not retrospectively reduce the interest already promised under those terms. A new deposit after maturity uses the new offer; an account with a variable rate follows its own change rules.
A hypothetical one-year deposit of KRW 10 million at 4% pays KRW 400,000 in simple interest before taxes and fees. Renew the same principal for another year at 3%, and the interest is KRW 300,000. The KRW 100,000 reduction affects income from the new contract; it does not reduce the interest earned under the old one.
A household with both the loan and deposit above experiences both sides. Over the same full year, KRW 250,000 less loan interest minus KRW 100,000 less deposit income leaves KRW 150,000 more across these two items. This assumes unchanged balances, constant rates and no taxes or fees. In practice, the loan reset and deposit maturity may be months apart, so the effects need not start together.
Compare the period you will actually keep the money
Withdrawing a term deposit early to chase a higher advertised rate can reduce the interest payable under the old contract. If the old deposit has two months left, calculate what the new rate would earn over those two months. Compare interest for the actual holding period, the old interest forgone, and any charges.
If you need the money in two months, check what you would earn on withdrawal then. A rate conditional on leaving it untouched for a year will not answer that question. With foreign-currency deposits, exchange rates affect the result too: our KRW–USD example earns dollar interest yet ends with fewer won.
Lower interest does not decide the direction of house prices
With the same balance and terms, a lower loan rate leaves a buyer spending less on interest. That can make a home purchase easier to fund. It does not establish what a particular home will cost or whether a buyer can obtain the loan required.
Suppose rates fall during a slowdown. Interest may be cheaper, but a buyer uncertain about future income can still delay a purchase. Another buyer may face a lower rate without being able to borrow the amount required. Housing supply and local employment also enter the decision. A policy cut alone cannot settle the timing or size of a price change.
For an existing borrower, lower interest does not cancel any principal. The agreed balance still has to be repaid. More room in a monthly budget depends on income, living costs and future principal repayments, as well as the new rate.
Your lender's change notice and previous statement should let you account for a different payment: check the rate, the days it covers and any principal repaid in between. Until you know the new contract rate and when it starts, the examples above remain illustrations rather than estimates of your next bill.
Sources and assumptions
- CFPB: US adjustable-rate mortgage indexes, resets and limits
- Financial Services Commission / Korea Policy Briefing: “It is incorrect to say loan rates will stay unchanged under the new COFIX” (25 January 2019; title translated from Korean)
The COFIX explanation above is restated and translated from the linked Financial Services Commission text, provided under Korea Open Government License Type 1 (attribution). It is used for the index definition, not historical rate forecasts; source photographs, diagrams and quoted newspaper passages are not reproduced.
The loan, deposit, reset and switching-cost examples are fictional. They use the balances, rates, periods and exclusions stated in each example, not current lender offers. See our editorial policy.
The linked government text is used under the conditions in the Korea Policy Briefing copyright policy.