A view of ATMs at commercial banks in Seoul. News1
Mortgage rates at banks are facing upward pressure across both fixed-rate and variable-rate products. With the top fixed-rate mortgage rate at commercial banks already exceeding 7 percent annually, the Cost of Funds Index (COFIX), which serves as the benchmark for variable-rate mortgages, has also risen across the board. Adding to this, the strong likelihood of a rate hike by the Bank of Korea’s Monetary Policy Board has raised the prospect that borrowers’ interest burden could grow even heavier.
According to the Korea Federation of Banks on the 15th, the COFIX based on new loans in June stood at 3.05 percent, up 0.15 percentage points from the previous month. It marks the first time in one year and five months, since January last year (3.08 percent), that the new-loan-based COFIX has climbed above 3 percent. It rose for a second consecutive month, following 2.89 percent in April and 2.90 percent in May this year.
The balance-based COFIX also rose 0.05 percentage points from the previous month to 2.94 percent, while the new-balance-based COFIX likewise increased 0.04 percentage points to 2.54 percent. Both indicators are at their highest levels since August last year.
COFIX is an index calculated as the weighted average of funding costs at eight domestic banks, including KB Kookmin, Shinhan, Hana, Woori and NH NongHyup. The balance-based figure reflects the average rate on funds raised by banks, such as deposits, savings and bank bonds, while the new-balance-based figure additionally includes lower-cost funds such as demand deposits.
Commercial banks’ variable-rate mortgage rates typically track one of three benchmark rates: the six-month financial bond, the new-loan-based COFIX, or the new-balance-based COFIX. When banks’ funding costs, such as those for deposits, savings and bank bonds, rise, COFIX also increases, and variable-rate mortgage rates that use it as a benchmark rise as well. Changes in COFIX are usually reflected in new variable-rate mortgage rates from the following business day.
Fixed-rate mortgage rates have already topped 7 percent annually at the upper end. As of the 13th, fixed and hybrid mortgage rates at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — ranged from 4.68 to 7.39 percent annually. Compared with the 3.93 to 6.23 percent recorded at the end of last year, the lower end rose 0.75 percentage points and the upper end rose 1.16 percentage points.
As fixed rates climb sharply, a considerable number of homebuyers are opting for relatively lower-rate variable products, but even these are expected to be difficult to shield from rising rates. As of the 14th, the five major banks’ six-month variable-rate mortgage rates ranged from 4.02 to 6.37 percent annually, with an upper end lower than that of fixed-rate products. However, with the new-loan-based COFIX jumping 0.15 percentage points in a month, COFIX-linked variable-rate mortgage rates are also set to rise further.
As banks tighten household loan management, moves to raise loan rates on their own are also continuing. NH NongHyup Bank raised its variable-rate and fixed-rate mortgage rates by 0.2 percentage points each last month. From the 1st of this month, Woori Bank ended the preferential rate of up to 1.1 percentage points that had applied to the five-year fixed-rate “Woori Apartment Loan” product. With the preferential rate gone, the effect for new borrowers is that the applied rate effectively rises.
The likelihood that the Bank of Korea’s Monetary Policy Board will raise the base rate on the 16th is also seen as high. As a base rate hike and rising bank loan rates overlap, households’ burden of repaying principal and interest is expected to grow. According to data submitted by the Bank of Korea to the office of People Power Party lawmaker Lee Jong-wook, a 0.25 percentage point rise in mortgage rates is estimated to increase the annual interest burden for all borrowers by about 1.8 trillion won. The annual interest burden per borrower would also increase by about 296,000 won, from an average of 5.843 million won to 6.139 million won. This includes individual mortgages, jeonse deposit loans and group loans at deposit banks, non-bank deposit-taking institutions and other financial institutions.
“As expectations that the base rate could be raised have been priced into the market, market rates have risen, and deposit rates have also increased along with them, driving up banks’ funding costs,” a banking industry official said. “With fixed-rate mortgage rates having already risen to reflect the increase in market rates, and now COFIX rising as well, upward pressure on loan rates will continue for the time being.”