Big Cut and COFIX Both 'Drop'... Will Slowed Household Loans Expand Again?

August KOFIX Falls 0.06%P to 3.36%... Declines for 3 Consecutive Months

As household loans, centered on mortgage loans, surged, their upward trend somewhat slowed in September, drawing attention to the impact of the U.S. Federal Reserve's (Fed) 'big cut' (a 0.50 percentage point reduction in the base interest rate) and the resulting decline in market interest rates.

In the financial sector, since expectations of an interest rate cut have already been reflected in the current market interest rates, loan interest rates are not expected to drop immediately. However, it is anticipated that this trend could influence investment sentiment related to asset markets such as real estate.

[Image source=Yonhap News]

According to the Korea Federation of Banks on the 20th, the COFIX based on new contracts in August was recorded at 3.36%, down 0.06 percentage points from the previous month. The COFIX index has shown a decline for three consecutive months since turning downward in June.

COFIX is the benchmark rate for variable-rate mortgage loans. As COFIX changes, each bank will adjust interest rates starting today. For example, in the case of Woori Bank, the variable-rate mortgage loan interest rate applying the 6-month COFIX fell by 0.06 percentage points from the previous day (5.11~6.31%) to 5.05~6.25%.

Recently, the bank bond interest rates, which serve as the basis for fixed and periodic mortgage loans accounting for over 90% of mortgage loans, have also been declining. According to the Korea Financial Investment Association, the 5-year bank bond interest rate dropped to around 3.145% as of the 13th. Compared to the beginning of the year when it was maintained around 3.8%, it fell by about 0.7 percentage points. Although the base interest rate remained unchanged, the market preemptively reflected the Fed's interest rate cut as a foregone conclusion.

Earlier, the Fed held an Open Market Committee (FOMC) meeting on the 17th-18th (local time) and lowered the base interest rate by 0.50 percentage points. While some European Union (EU) countries implemented rate cuts, the Fed also joined this trend. This is the first time the Fed has lowered the base interest rate in about two years and six months since 2022.

The financial sector is concerned that the Fed's rate cut and the resulting market interest rate adjustment could affect the slowing trend of household loan growth. Although the rate cut was considered a 'given' since the beginning of the year and is already reflected in market interest rates, it could influence investment sentiment.

An official from a commercial bank said, "Since the current market interest rate has already preemptively reflected the base rate cut, it will decrease, but the possibility of a rapid decline in market interest rates is low. However, the Fed's rate cut is expected to affect real estate investment sentiment."

Authorities have also taken preemptive measures as this trend could impact household debt. On the previous day, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, held a macroeconomic and financial meeting with the heads of the Financial Services Commission, Financial Supervisory Service, and Bank of Korea, stating, "If the housing market overheats or household debt increases rapidly, additional management measures will be implemented promptly and decisively."

According to the financial sector, as of the 13th, the outstanding balance of mortgage loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was KRW 571.4234 trillion, an increase of KRW 2.7618 trillion compared to the end of the previous month. Although the trend has somewhat slowed compared to August, when the loan balance increased by as much as KRW 8.2 trillion in one month, the upward trend itself is maintained.

Given this, the Bank of Korea is also showing a cautious stance toward lowering the base interest rate, as a rate cut could lead to an increase in household debt. Despite the Fed's rate cut, the U.S. base interest rate remains at 5.0%, which is still 1.5 percentage points higher than Korea's 3.5%. Even if an additional 0.50 percentage point cut is made within the year as forecasted, the gap will still be 1 percentage point.

Professor Kim Sang-bong of Hansung University's Department of Economics said, "The reasons why real estate prices are rising under the current circumstances include the approaching end of the 2+2 lease renewal request right and the liquidity released into the market due to the Bank of Korea's insufficient base rate hikes stimulating the market," adding, "Under the current situation, efforts to reduce the total amount of household debt accumulated through mortgage loans and jeonse (long-term deposit) loans should take priority over interest rate cuts."