Bank Bonds and COFIX Continue to Rise... Will Mortgage Loans Reach the 7% Range?

Financial Bonds and COFIX Rise Consecutively
Mortgage Loans Return to Mid-6% Range... Upward Trend Expected to Continue

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The yields on bank bonds, which serve as the benchmark for mortgage loan interest rates, and the Cost of Funds Index (COFIX) have been rising continuously. There are forecasts that mortgage loan rates will soon reach the 7% range.

According to the Korea Financial Investment Association on the 14th, the 5-year financial bond (unsecured, AAA) yield, which is the basis for calculating variable mortgage loan rates, recorded 4.114% on the 13th. This is about 1.82 times higher compared to 2.259% at the end of last year. Since the end of last month, it has crossed 4%, and on the 1st of this month, it surged to 4.397%. This was the highest level in 11 years since May 9, 2011, when it was 4.40%.

COFIX, a major factor in determining mortgage loan rates, is also steadily rising. The COFIX based on new contracts for July, announced on the 16th of last month, recorded 2.90%, marking the largest increase ever (0.52 percentage points). It has been rising for six consecutive times this year, maintaining a high trajectory. Since COFIX based on new contracts reflects the funds newly raised by banks each month, it is sensitive to market interest rates. Recently, as banks have intensified competition on deposit interest rates, their funding costs have increased accordingly.

In fact, due to government criticism of 'profiting from interest,' pressure from the right to request interest rate reductions, and disclosure system demands regarding the interest rate spread between deposits and loans, banks have hurriedly raised interest rates on deposit products. As a result, the balance of fixed-term deposits at the five major banks increased by KRW 17.9776 trillion at the end of last month compared to the previous month. Conversely, the balance of demand deposits, which yield only about 0.1% interest, decreased by KRW 13.6794 trillion during the same period. Coupled with the rise in bank bond yields, banks' funding costs have increased, inevitably pushing up the 'cost' of loans.

Given this trend, there are forecasts that mortgage loan rates could soon reach 7%. As of the 13th, the mortgage loan rates at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?range from 4.06% to 6.32% annually for variable rates. After hitting the 7% range in June and then dropping to the 5% range due to government pressure, rates are now climbing back toward the mid-6% range. Since the Bank of Korea has been raising the base interest rate daily and funding costs are increasing, the upward trend is expected to continue for the time being. Already, when the base rate rose by 1.5 percentage points over a year, COFIX increased by 1.61 percentage points, and the 5-year financial bond yield rose by about 1.7 percentage points.

Not only the interest rate hikes but also the fact that companies facing difficulties in raising funds in the bond market are increasing bank loans adds to the burden on loan customers. While corporate loans at the five major commercial banks decreased by KRW 2.1127 trillion for large corporations and KRW 3.6401 trillion for small and medium enterprises, household loans decreased by KRW 985.8 billion during the same period. Youngsoo Seo, a researcher at Kiwoom Securities, said, “As large corporations and high-quality SMEs increase bank loans, banks with increased risk-weighted assets are inevitably reducing household loans,” adding, “From the perspective of borrowers who have excessive debt relative to their repayment capacity, not only the rise in loan interest rates but also the reduction in bank lending will act as a significant burden.”

This content was produced with the assistance of AI translation services.