Definition
In Korea, COFIX (Cost of Funds Index) is a benchmark that averages what major Korean banks actually paid to raise the money they lend out. It is commonly used as the base rate for variable-rate loans such as mortgages.
Banks Buy Money Wholesale, Too
Say a fruit stand owner pays more for apples at the wholesale market. The price of apples at the stand goes up. Banks work the same way. A bank doesn't lend out only the cash sitting in its vault. It buys money from outside, through people's deposits and through bonds.
The interest a bank promises to pay to get that money is its "wholesale cost." Interest on time deposits, interest on savings accounts, and the rates on bonds the bank issues all count. Gather all of those costs and average them each month, and you get the Cost of Funds Index (COFIX).
When costs rise, prices rise. So when COFIX goes up, the loan rate the bank charges customers naturally goes up too. On the other hand, if a bank gathered plenty of money at low interest, COFIX goes down, and borrowers' interest burden shrinks.
How Do the New-Funds and Balance Versions Differ?
In the news or at a bank counter, you'll mostly see two main versions: the "new funds" basis and the "balance" basis. There's also a "new balance" basis, which includes low-rate money like checking-type deposits, and a weekly "short-term COFIX." The two main versions differ in when and how they are calculated.
New-funds COFIX looks only at the average cost of the money the banks raised newly over the past month. When market rates climb or drop sharply, that change shows up in the index fast. So when rates are falling quickly, loans tied to this version get cheaper sooner. When rates are rising, they get more expensive sooner.
Balance-basis COFIX, by contrast, averages the cost across the entire stock of deposits, savings, and bonds the bank is holding as of the end of that month. Money raised at high or low rates in the past is mixed in. So even when market rates swing, the index moves very gently. Loans tied to it swing less, too.
A Closer Look: How Is Your Own Loan Rate Set?
Many people think the COFIX number is the loan rate. To be more precise, the rate you actually pay the bank is COFIX plus the bank's margin and your personal credit profile.
The formula looks like this: "Final loan rate = COFIX (base rate) + spread - preferential discount." COFIX is the common cost that applies to everyone the same. On top of it comes a spread that varies with your credit score and the bank's operating costs. Discounts for things like direct deposit of your paycheck or credit card spending are the preferential discount.
So even if COFIX falls, the interest you owe may not drop much if the bank raises its spread. Banks also use different spreads and discount conditions, which is why two people tied to the same COFIX can end up with different final rates.
Common misconceptions
COFIX is the base rate that the Bank of Korea sets at its policy meetings.
It's different from the policy rate set by the Bank of Korea. COFIX is a market indicator that adds up what Korea's 8 major banks actually spent to raise funds. The Korea Federal Bankers Association announces it around the 15th of each month.
Where you meet it
If banks' deposit rates all rise at once, next month's COFIX goes up too. Then the interest on a variable-rate mortgage increases when its rate reset date comes around.
When the Bank of Korea's base rate is being cut, rates on loans tied to new-funds COFIX fall sooner than those tied to the balance basis.
In one sentence
COFIX is the average wholesale cost banks pay to get money, and it's the starting point for variable mortgage rates.