A new loan product with lower interest than the variable-rate mortgage loans currently on sale is expected to launch. The financial authorities expect consumers' interest burdens to ease and their product choices to expand.
According to the financial sector on the 2nd, the "task force (TF) to support the launch of KOFR (Korea Overnight Financing Repo Rate)-based loan products," joined by the Financial Services Commission, the Financial Supervisory Service, the Korea Federation of Banks, and commercial banks, is set to discuss ways to launch KOFR-based household loan products. The plan is for the Industrial Bank of Korea (IBK) to first introduce KOFR corporate loans, followed by commercial banks launching KOFR household loans.
KOFR loans are expected to carry lower interest than loans currently sold based on certificates of deposit (CD), the cost of funds index (COFIX), or bank bonds. KOFR is a risk-free benchmark rate derived from the repo (RP) rate on securities collateralized by Government Bonds issued by the state and monetary stabilization bonds issued by the Bank of Korea to manage money supply. It represents the theoretical minimum return obtainable without credit risk. Because it is safer than CDs or bank bonds that banks issue to raise funds, the rate is lower.
As of the 31st of last month, the KOFR rate was 2.58%, which was 0.34 percentage points (P) lower than AAA-rated bank bonds (2.92%) linked to mortgages and jeonse loans. It is also lower than the CD rate (2.82%) linked to corporate loans or the COFIX for new loans extended (2.82%) linked to mortgages.
At a KOFR-related conference in Nov. last year, the Bank of Korea said, "If the spread is the same, KOFR loans are expected to reduce consumers' interest burdens on loans." Norway's Central Bank analyzed that the United States introduced a risk-free benchmark rate similar to KOFR (SOFR), which eased consumers' loan interest.
KOFR loans have the advantage of stable rates even if financial institutions' credit risk expands. Even when rates rise, the magnitude of the increase is limited.
The financial authorities also expect customer choices to expand. Consumers will likely be able to choose between COFIX mortgages and KOFR mortgages. An official at the financial authorities said, "The final lending rate may vary depending on each bank's lending policy. Broadening consumers' choices of rates is the biggest purpose of introducing (KOFR household loans)."