Mortgage rates at South Korean banks are on the rise again. After the upper end of fixed-rate mortgage rates already surpassed an annual 7% due to rising market rates, the Cost of Funds Index (COFIX), the benchmark for variable rates, has also turned upward. With banks tightening household loan management and the Bank of Korea potentially raising its base rate, observers say the interest burden on borrowers could keep growing for some time.
According to the Korea Federation of Banks on the 15th, COFIX based on newly handled loans stood at 3.05% last month. The figure jumped 0.15 percentage point from a month earlier, rising back above 3% for the first time in one year and five months since it recorded 3.08% in January last year. New COFIX rose from 2.89% in April this year to 2.90% in May, and increased through June for two consecutive months.
Other COFIX indicators rose in tandem. Balance-based COFIX increased 0.05 percentage point from the previous month to 2.94%, while new-balance-based COFIX rose 0.04 percentage point to 2.54%. Both the balance-based and new-balance-based figures are at their highest levels since August last year.
COFIX is an index reflecting the costs incurred by eight banks, including KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup, when they raise funds through deposits, installment savings, and bank bonds. Balance-based COFIX shows the average cost of funds a bank has already secured, while the new-balance-based figure is calculated by including relatively low-interest funds such as demand deposits.
Variable-rate mortgages at banks are set based on benchmarks such as six-month financial bonds or COFIX based on newly handled loans and new balances. When a bank's cost of funding rises, COFIX increases, and the loan rates linked to it follow suit. This latest COFIX increase will likewise be reflected in variable-rate mortgages newly handled from the following business day.
Borrowers had been turning to relatively lower-interest variable-rate products as fixed-rate mortgage rates rose rapidly. As of the 14th, six-month variable-rate mortgage rates at the five major banks ranged from an annual 4.02% to 6.37%, with a lower upper end than fixed-rate products. However, with new COFIX rising 0.15 percentage point within a month, borrowers choosing variable-rate products will also find it difficult to avoid a larger interest burden.
Fixed-rate mortgage rates have already risen considerably. As of the 13th, fixed and hybrid mortgage rates at the five major banks stood at an annual 4.68% to 7.39%. Compared with the annual 3.93% to 6.23% at the end of last year, the lowest rate rose 0.75 percentage point and the highest rate rose 1.16 percentage points.
The fact that banks are tightening loan conditions on their own to control the pace of household loan growth is another factor increasing the burden on borrowers. NH NongHyup Bank raised its variable-rate and fixed-rate mortgage rates by 0.2 percentage point each last month. Woori Bank also eliminated the preferential rate of up to 1.1 percentage points that it had offered on the five-year fixed-rate "Woori Apartment Loan" starting this month. Due to the reduction in preferential benefits, the rate actually borne by new borrowers has risen accordingly.
The market is also paying attention to the possibility of a base rate hike at the Bank of Korea's Monetary Policy Board meeting on the 16th. With market rates and banks' funding rates already rising, an additional base rate hike could cause households' principal and interest repayment burden to grow more quickly.
"As expectations of a base rate hike are reflected in the market in advance, bond yields are rising, and deposit rates such as those on savings and installment savings are rising together," a banking industry official said. "For banks, the burden of funding costs inevitably grows." The official added, "Following fixed-rate products, which reflect market rates first, there is a growing possibility that rates on COFIX-linked products will also rise, so the upward trend in mortgage rates could continue for some time."
