Borrowers’ interest burden expected to ease as Cofix falls

[Photo by Yonhap]

The Cost of Funds Index (Cofix) in South Korea, the benchmark for short-term financing cost, fell back to the 3 percent range in December 2023 for the first time in two months after rising above 4 percent in the second half of that year due to higher funding rates for commercial banks and competition for deposits.

According to the Korea Federation of Banks on Monday, the Cofix (based on new loans) stood at 3.84 percent in December 2023, down 0.16 percentage point from the previous month. After falling to 3.66 percent in August 2023, the Cofix rose to 3.82 percent in September and 3.97 percent in October before hitting the 4 percent mark in November.

The Cofix is the weighted average funding rate of eight major banks and serves as a basis for adjusting variable rates for mortgage loans and jeonse loans, or loans for long-term housing rental deposits, at commercial banks. It is expected that commercial banks will adjust their loan rates in accordance with the changes in Cofix from Tuesday.

Experts attribute the decline in Cofix to the U.S. Federal Reserve’s decision to keep its benchmark interest rate unchanged in the second half of 2023 while signaling a possible end to its tight monetary policy and easing of interest rate policy for 2024.

“Expectations that the Fed will cut its benchmark rate led to a drop in U.S. Treasury yields at the end of 2023, which in turn influenced the decline of Korean government bond and bank bond yields, leading to the drop in Cofix,” said Seok Byoung-hoon, a professor of economics at Ewha Womans University.

The 10-year U.S. Treasury rate, which stood at 4.73 percent in early November 2023, dropped nearly 1 percentage point to 3.86 percent by the end of December.

According to the Korea Financial Investment Association, the interest rate on unsecured bank bonds (AAA) with a 5-year maturity, hit 4.77 percent at the end of October 2023, but turned to a downward trend at the end of November (4.17 percent) and dropped to around 3.7 percent at the end of December.

The Cofix based on the outstanding balance was 3.87 percent in December 2023, down 0.02 percentage point from the previous month, and the new balance-based Cofix was 3.29 percent, down 0.06 percentage point from the same period.

The decrease in Cofix is expected to be reflected from Tuesday, easing the interest burden of borrowers who have taken out variable-rate mortgages and jeonse loans.

As of Monday, the annual loan rates of the country’s five major commercial banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup, are 4.01 to 6.23 percent for variable-rate mortgages and 3.81 to 5.91 percent for jeonse loans.

The question is whether the steady decline in Cofix will continue.

Kim Young-do, a senior research fellow at the Korea Institute of Finance, predicted that “the Cofix will remain at a declining or flat level for the time being.”

The downward trend of Cofix could lead to a decline in loan rates, potentially stimulating household loans that has slowed in growth. While there are analysts who believe that the decline in December will have a limited impact, the impact may be greater if the Cofix and interest rate cuts continue moving forward.

“In the end, the key factor affecting loan growth will be when and to what extent the Bank of Korea cuts its benchmark interest rate,” said Ahn Dong-hyun, a professor of economics at Seoul National University.