COFIX Falls for 11 Consecutive Months... Mortgage Share Quadruples

COFIX Rate Continues to Decline
Share of COFIX-Linked Mortgages Expands
7.9% in August... Highest in 20 Months

The proportion of borrowers choosing variable interest rates linked to COFIX (Cost of Funds Index) when taking out mortgage loans is rising again. As the COFIX rate has steadily declined for 11 consecutive months, this proportion has reached its highest level in 20 months. In contrast, among variable-rate products, those linked to market rates have seen a noticeable decrease in share, and fixed-rate mortgage loans have also been declining for three consecutive months.

According to the Bank of Korea's Economic Statistics System on October 8, the proportion of variable-rate mortgages among newly issued mortgage loans by deposit banks stood at 11.7% as of the end of August this year. After dropping to 8.4% in May, it has increased for three consecutive months. Conversely, the share of fixed-rate mortgages rose to 91.6% but then fell to 88.3%.

Although many borrowers still choose fixed rates, the proportion of COFIX-linked variable-rate mortgages has been increasing significantly. As of the end of August, the share of deposit rate-linked mortgages using COFIX as the benchmark rate was 7.9%, the highest since December 2023 (7.9%). Compared to November last year, when it was 2.0%, this represents nearly a fourfold increase in 11 months. Notably, the share was 3.7% in June, 6.3% in July, and 7.9% in August, indicating a steep upward trend in recent months.

COFIX is the weighted average interest rate of funds raised by eight domestic banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup, IBK, Citibank Korea, and SC First Bank), and is determined monthly. It reflects changes in the interest rates of deposit products such as savings accounts and bank bonds actually handled by banks. In the mortgage market, it is used as a representative benchmark rate for variable-rate products, along with the six-month bank bond rate.

The rebound in demand for COFIX-linked mortgages is closely related to the declining trend of COFIX itself. According to the Korea Federation of Banks, COFIX has fallen for 11 consecutive months since dropping to 3.37% in November last year. As of September, it had fallen to 2.49%.

On the other hand, among variable-rate mortgages, the share of products linked to market rates such as the six-month bank bond rate fell from 16.2% in November last year to 3.8% in August. The six-month bank bond rate was 3.37%-the same as COFIX-as recently as November last year, but widened to 2.54% in August, and as of October, has slightly risen to 2.56%. A financial industry official said, "While COFIX continues to decline and expectations for further decreases are growing, market rates have become even more volatile due to factors such as exchange rates and international affairs. As a result, the stability of the benchmark rate is influencing borrowers' choices."

However, some point out that it will not be easy for COFIX-linked mortgages to rapidly replace fixed-rate demand. This is because the government is effectively encouraging the selection of fixed-rate mortgages by recommending that banks increase the share of mortgages with fixed rates and interest rate adjustment periods of five years or more to over 30%. The three-stage Stress Total Debt Service Ratio (DSR), implemented since July this year, also raised the stress rate application ratio for long-term fixed-rate loans, allowing for higher loan limits.

As a result, even in a period of falling interest rates, banks are adjusting fixed rates to be lower than variable rates by expanding the spread or reducing preferential rates. In fact, as of August, the average fixed-rate mortgage interest rate was 3.94%, while the average variable rate was 4.08%, a difference of 0.14 percentage points. A financial industry official said, "With expectations for a base rate cut, some borrowers are increasingly likely to choose variable rates. While the share of COFIX-linked mortgages may increase by absorbing variable-rate demand, it is unlikely to expand rapidly enough to quickly replace fixed rates."