🚨 Downward Trend in Mortgage Variable Interest Rates

Today Korean Economic News | 2025.01.16

📌 Mortgage Variable Interest Rate Falls 0.13%p... Third Consecutive Month of Decline

💬 The COFIX (Cost of Funds Index), which serves as the benchmark for mortgage variable interest rates, has fallen by 0.13 percentage points, marking a decline for the third consecutive month. This index, calculated based on the funding costs of eight domestic banks, recorded 3.22% for December based on newly handled loan amounts.

1️⃣ Easy to Understand

This is news that mortgage variable interest rates have been declining for three consecutive months. In simple terms, it means that the monthly interest burden for people who have borrowed money from banks using their homes as collateral is gradually decreasing.

Let me explain with an everyday example. Mr. Kim took out a 300 million won mortgage with a 30-year term. Since he took the loan with a variable interest rate, the monthly payment increases when rates rise and decreases when rates fall. With this 0.13 percentage point drop in COFIX, Mr. Kim's monthly payment could decrease by about 30,000 won. Calculated over a year, that's a reduction in interest burden of about 360,000 won.

COFIX, simply put, is 'the cost for banks to raise funds.' When the interest that banks pay to depositors or the cost of issuing bonds decreases, this index also decreases. A decrease in COFIX means that banks' funding costs have decreased, and some of this benefit is passed on to borrowers.

The three-month consecutive decline could be seen as a signal that interest rates may fall further in the future, which could be good news for many people with mortgage loans.

2️⃣ Economic Terms

📕 COFIX (Cost of Funds Index)

COFIX is an interest rate indicator calculated based on the funding costs of eight major domestic banks in Korea.

• It serves as the benchmark for mortgage loans or deposit interest rates and is influenced by changes in the Bank of Korea's base rate.
• It is calculated based on both newly handled loan amounts and outstanding balances, with variable rate mortgage loans typically linked to the COFIX based on newly handled amounts.

📕 Mortgage Loan

A mortgage loan refers to a loan received from a financial institution using housing as collateral.

• Generally, loans are available up to a certain percentage (LTV, Loan-to-Value ratio) of the value of the home provided as collateral.
• Borrowers can choose between fixed rates and variable rates, and repayment methods include equal principal and interest payments, equal principal payments, and balloon payments at maturity.

📕 Variable Rate

A variable rate is a loan method where the interest rate fluctuates according to market conditions during the loan period.

• It is determined by adding a spread to indicators such as COFIX or CD rates, and is typically recalculated every 3 or 6 months.
• It has the advantage of reducing interest burden when market rates fall, but the disadvantage of increasing burden when rates rise.

📕 Spread

The spread is an interest rate added on top of the base rate.

• It is determined considering the borrower's creditworthiness, collateral value, loan period, and the bank's margin.
• For example, if the COFIX is 3.22% and the spread is 1.0%, the final loan interest rate would be 4.22%.

3️⃣ Principles and Economic Outlook

💡 Background and Outlook for Interest Rate Decline

• The three consecutive months of COFIX decline is the result of multiple economic factors working together. First, it can be seen as a signal that the Bank of Korea's monetary policy stance is gradually shifting toward easing. Concerns about a global economic slowdown and forecasts of declining domestic economic growth rates are putting pressure on interest rate cuts. Second, bank funding costs are decreasing as market liquidity increases. This is leading to lower deposit rates, driving the COFIX down. Third, the interest rate cutting trend of major global central banks is also influencing domestic interest rate declines. Economic experts are forecasting that COFIX has a high possibility of further decline through the first half of this year. However, some suggest that the extent of the decline could be limited in the second half of the year as concerns about inflation may resurface along with economic recovery.

💡 Impact on Household Debt and the Housing Market

• A decline in mortgage interest rates directly affects household debt and the housing market. First, as the interest burden on households decreases, disposable income increases. This can increase spending capacity and contribute to economic stimulation. Additionally, as the repayment burden of variable-rate loans decreases, there is a possibility of improved soundness of household debt. In terms of the housing market, lower loan rates can act as a factor that increases housing purchasing power. Especially if the low-interest trend continues, housing demand may increase, potentially leading to upward pressure on housing prices. However, because various factors such as government real estate policies, economic conditions, and demographic changes are interacting in complex ways, it is difficult to predict the overall flow of the housing market based on interest rate declines alone. Experts are forecasting that while interest rate declines may have a positive impact on the housing market in the short term, other structural factors will have a greater influence in the long term.

💡 Mortgage Strategies and Implications

• Strategic choices for mortgage borrowers are becoming important as the COFIX downward trend continues. First, people who currently have fixed-rate loans may consider switching to variable rates. However, they must comprehensively consider costs incurred when refinancing (early repayment fees, mortgage registration fees, etc.) and future interest rate forecasts. Second, it may be advantageous in the long term for variable-rate borrowers to use extra funds from interest rate decreases for additional principal repayments. This has the effect of reducing the principal and decreasing risk in case of future interest rate increases. Third, people who are considering new mortgage loans should consider the interest rate downward trend but choose loan products that match their financial situation and long-term housing plans. From the financial authorities' perspective, it is necessary to monitor the possibility of household debt increases due to interest rate declines and manage to prevent excessive borrowing for real estate investment.

4️⃣ In Conclusion

The three consecutive months of decline in mortgage variable interest rates are expected to bring the positive effect of reducing interest burdens for borrowers in the short term. Particularly, households with variable-rate loans may have more flexibility in their household finances as monthly payments decrease.

However, it is uncertain whether this downward trend in interest rates will continue in the long term. Since there are various variables such as the global economic situation, central bank monetary policy direction, and inflation trends, borrowers need to establish loan strategies from a medium to long-term perspective rather than judging based only on the current situation.

A particularly noteworthy point is the impact of interest rate declines on the housing market. Decreased loan costs can improve the purchasing power of potential home buyers, which may lead to increased housing demand. However, to accurately predict the direction of the housing market, other factors such as government real estate policy direction, economic outlook, and demographic changes must also be considered.

Financial authorities and policy makers should closely monitor the possibility of household debt increases due to interest rate declines and prepare policy responses for financial stability and housing market balance. Learning from past experiences where household debt surged during low-interest periods, preemptive risk management is important.

From a borrower's perspective, it is important to maximize the benefits of interest rate declines while establishing stable financial plans within the range of their repayment capacity. Especially when considering additional loans or refinancing, it is necessary to comprehensively evaluate the total cost and risk over the loan period, not simply the current interest rate.

Ultimately, the decline in mortgage variable interest rates provides an opportunity for short-term cost savings, but a cautious approach from all economic actors is needed for long-term financial stability and healthy development of the housing market.