South Korean banks saw a slight easing in corporate funding costs in January, with the benchmark cost of funds index (COFIX) declining for the first time in five months, according to data released by the Bank of Korea on Tuesday. However, this decrease in funding costs has not translated into lower loan rates for consumers, as mortgage rates continue to climb.
The COFIX, which serves as a key determinant for variable-rate mortgages, fell to 2.77% in January, down from 2.89% the previous month. This marks the first decline since September 2025, after four consecutive months of increases. The index reflects the weighted average interest rates on funds procured by domestic banks, including deposits, bonds, and other sources.
The decrease in COFIX is largely attributed to a reduction in deposit rates offered by banks. NH NongHyup Bank lowered the interest rate on its one-year fixed deposit to 2.9% in January, from 3% previously. 3% interest rates on fixed deposits have disappeared from the offerings of the five major banks – KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup.
Despite the lower COFIX, variable-rate mortgage rates offered by the five major banks have actually risen. As of February 19, 2026, these rates ranged from 3.65% to 6.05%, up from 3.77% to 5.87% a month earlier. Fixed-rate mortgage rates have also increased, moving from a range of 3.91% to 6.21% to 4.18% to 6.78% over the same period.
Banking officials attribute the divergence between falling funding costs and rising mortgage rates to a combination of factors. A bank official, speaking on condition of anonymity, explained that reduced demand for loans, coupled with expectations of rising market interest rates, has led to a more cautious lending approach. “The need for funds decreased compared to the end of last year, which influenced the lowering of deposit rates, impacting the COFIX,” the official said. “The strengthening of regulations on household loans at the beginning of the year, combined with a conservative lending approach, has reduced the availability of funds.”
Market interest rates are also being influenced by expectations surrounding potential interest rate hikes by the U.S. Federal Reserve. The yield on South Korea’s three-year government bond rose from 2.950% at the end of last year to 3.140% on February 13, 2026. Similarly, the five-year government bond yield, which serves as a benchmark for fixed-rate mortgages, increased from 3.499% to 3.687% during the same period.
Banks anticipate that the upward trend in mortgage rates will likely continue in the near term, given the limited incentives for banks to engage in competitive funding. Another banking source noted that the possibility of a U.S. Federal Reserve rate increase further contributes to market volatility. “There is not much incentive for banks to strengthen funding competition, so the volatility of the COFIX is expected to be limited,” the source stated.
In response to the rising mortgage rates, South Korean financial authorities are considering the introduction of ultra-long-term fixed-rate mortgage products with terms of up to 30 years. Currently, most fixed-rate mortgages offered by banks have a fixed-rate period of five years, after which the rate is adjusted or reset every five years.
