August KOFIX at 2.90%... Highest Since February 2013
Variable Mortgage Loan Upper Limit Surpasses 6%... Exceeds Fixed Rate
Base Rate Continuous Rise Reversal Expected to Persist
Some View 'Peak' Approaching... Careful Choices Needed
[Asia Economy Reporter Minwoo Lee] The COFIX (Cost of Funds Index), which serves as the benchmark for variable-rate mortgage loans, has surged by the largest margin in history, approaching 3%. The phenomenon of variable interest rates exceeding fixed rates is expected to continue for the time being.
According to the Korea Federation of Banks on the 17th, the July COFIX based on new transactions rose by 0.52 percentage points (P) from the previous month to 2.90%. This is the largest increase since the Korea Federation of Banks began disclosing the data in February 2010. The figure itself is also 'record-breaking.' COFIX has reached the 2.9% range for the first time since February 2013 (2.93%).
COFIX is the weighted average interest rate of funds raised through deposits and savings by eight banks: KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK Industrial Bank, SC First Bank, and Korea Citibank. As the Bank of Korea raised the base interest rate four times consecutively this year, banks competed to raise deposit and savings rates, causing COFIX to follow suit. The rise in COFIX ultimately means that banks' funding costs have increased, which leads to higher loan interest rates.
With COFIX soaring, the inversion phenomenon?where variable mortgage loan rates have been higher than mixed-rate (5-year fixed) loans for about a month?is expected to continue for the time being. According to the financial sector, as of this day, the variable mortgage loan interest rate range at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?is between 4.29% and 6.11%. Due to banks' loan rate reduction measures, the upper limit of variable mortgage loan rates, which had fallen to the 5% range, has now exceeded 6%.
On the other hand, the mixed-rate mortgage loan interest rate range is between 3.93% and 5.80%, with the lower end still remaining in the 3% range. This is because the 5-year financial bond rate, which serves as the benchmark for mixed-rate mortgage products, has shown stability. According to the Korea Financial Investment Association's Bond Information Center, the 5-year AAA-rated financial bond rate recorded 3.634% as of the previous day. After reaching a yearly high of 4.147% on July 13, it has stabilized around 3.6%. This is interpreted as a result of falling long-term government bond yields amid concerns about an economic recession.
Additionally, the proportion of variable-rate loans among new loans has stopped increasing recently. According to the Bank of Korea's Economic Statistics System, the share of variable-rate loans based on new transactions in May was 82.6%, while fixed-rate loans accounted for 17.4%. However, in June, these figures shifted to 81.6% and 18.4%, respectively, indicating a trend toward an increasing share of fixed-rate loans. With variable rates surpassing fixed rates from July, it is expected that the proportion of fixed-rate loans has further increased from the third quarter onward.
As the Bank of Korea is expected to raise the base interest rate, which has already reached 2.25%, to 3% by the end of the year, the upward trend in COFIX is anticipated to continue for the time being. However, there is also optimism about easing inflation originating from the U.S., leading some to believe that the peak of the rate hike cycle has been reached. Until June, there were claims that the Bank of Korea might continue raising the base rate next year, but recently, these views have somewhat subsided. The slower-than-expected recovery of the U.S. economy has sparked calls to slow the pace of rate hikes. The U.S. economy contracted by 0.9% quarter-on-quarter in the second quarter of this year, following a 1.6% decline in the first quarter, marking two consecutive quarters of contraction.
Therefore, prospective mortgage borrowers are advised to carefully choose between variable and mixed rates according to their personal circumstances. A representative from a commercial bank explained, "If the interest burden feels immediately heavy, choosing a mixed rate might be advantageous. However, since there are opinions that the rate hike period will not last for several years, those with some financial leeway should consider their options more thoroughly."
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