Mortgage rates from S. Korean banks fall along with COFIX benchmark

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The minimum interest rate for mortgage loans from commercial banks in South Korea is set to decline to the 3 percent annualized range, as COFIX, or Cost of Funds Index, a benchmark lending rate for mortgage loans, fell again for the first time in a month.

According to the Korea Federation of Banks (KFB) on Monday, COFIX for new mortgage loans was 3.44 percent in April, down 0.12 percentage points from 3.56 percent in March. COFIX had declined for three consecutive months from December last year to February this year before rebounding in March but fell again in April. This is only the third time that the rate has fallen below the benchmark rate of 3.5 percent since it was launched in February 2010.

“As expectations grew that the benchmark rate hike cycle was coming to an end, market interest rates, including those on bank bonds, fell, reducing borrowing costs for commercial banks,” said a local commercial bank official.

Accordingly, Korean lenders will apply Tuesday’s COFIX to floating interest rates on their new mortgage loans. The annual floating interest rate at KB Kookmin Bank on new loans will decline to the 3.97-5.37 percent range from the 4.09-5.49 percent range.

This means that the lower end of the interest rate for many borrowers is back to where it was at the end of July last year before the rate hikes began. KB Kookmin Bank’s hybrid rate for mortgage loans also fell to the 3.63-5.03 percent range, meaning the lower end of the rate coming back to the 3 percent range.

The floating interest rate at Woori Bank will also drop to the 4.33-5.53 percent range from the 4.45-5.65 percent range.

There are also views that mortgage rates at other lenders will also drop to the 3 percent range, given potential competition for lower interest rates among lenders with the launch of refinancing loan platforms while KakaoBank and other internet banks are engaged in aggressive sales by launching mortgage products with an annual interest rate below 4 percent.

The annual interest rate for jeonse loans that involve a large lump-sum deposit is also expected to fall to reflect the drop on COFIX. The rate at Kookmin Bank will decline from the 3.69-5.09 percent range to the 3.57-4.97 percent range, with the top end of the interest rate corridor, which shows the interest rate trend, falling to the 4 percent level for the first time in a commercial bank.

As COFIX has fallen below the benchmark rate, more borrowers are expected to feel the drop in loan interest rates. The Bank of Korea has frozen the benchmark rate, encouraging banks to cut interest rates on cash-strapped borrowers, but it was difficult for existing borrowers to feel the effect of interest rate cuts as COFIX was higher compared to six months ago. The COFIX interest rate is determined every six months.

For example, COFIX on new loans in March was 3.56 percent, which was higher than the COFIX rate of 3.4 percent in September six months ago. However, the COFIX rate in April was 3.44 percent, lower than 3.98 percent in October last year, six months ago.