Interest Rate Hike Leverage Warning... "Response Needed Mainly for Credit Loan Borrowers"

"Borrowers with higher variable interest rate proportions and shorter maturities on credit loans are more affected"

[Asia Economy Reporter Park Sun-mi] As the possibility of the Bank of Korea raising the base interest rate in August increases, awareness is growing about the need for debt management, especially among investors who have entered the financial market with excessive leverage and borrowers of short-term unsecured loans. Although market interest rates have recently risen rapidly in anticipation of the base rate hike, the increase in household loans has not yet slowed, leaving open the possibility that financial authorities may tighten household debt regulations more strongly.

According to Bank of Korea statistics on the 9th, unsecured loans by domestic financial companies increased by 15.2% last year, mainly at banks, marking the highest growth rate since 2010. Among these, the proportion of variable-rate unsecured loans rose to 77.7% as of the end of March this year. By remaining maturity, 41.9% are six months or less, 42.5% between six months and one year, 8.3% between one and three years, and 7.4% over three years, indicating a concentration in short-term loans. This means that with the significant increase in bank unsecured loans, there are more borrowers with variable-rate loans and short maturities.

If interest rate normalization begins, borrowers with a high proportion of variable-rate unsecured loans and short maturities will inevitably be hit the hardest. The Korea Institute of Finance predicted in its report "Financial Consumer Response to Interest Rate Normalization" that when interest rate normalization starts, borrowers with a high proportion of variable-rate unsecured loans and short maturities will be relatively more affected than mortgage borrowers.

Variable-rate (loan base rate + spread) products adjust periodically to reflect market fluctuations in the loan base rate. Unsecured loans use bank bond rates as the loan base rate, while mortgage loans use the COFIX rate.

While bank bond rates respond sensitively to market conditions, COFIX rates also depend on deposit interest rates influenced by banks' business strategies, such as the need to attract deposits. Therefore, during periods of rising interest rates, unsecured loan rates are likely to increase faster. According to the Korea Federation of Banks, the average spread on general unsecured loans at the five major commercial banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?has risen by up to 0.3 percentage points compared to the beginning of the year, reflecting a rapid increase.

Despite strengthened household loan management by financial authorities, household loan balances at commercial banks are surging. At the end of last month, the household loan balance at the five major commercial banks stood at 695.3081 trillion won, an increase of 6.2009 trillion won from the end of June. Although household loan balances decreased by 3.0546 trillion won in May compared to the previous month, the increase expanded for two consecutive months in June (1.2996 trillion won) and July (6.2009 trillion won). This suggests that the application of a 40% total debt service ratio (DSR) limit for all borrowers, which began in July, has yet to take effect.

In particular, the personal unsecured loan balance at the five major banks reached 140.8931 trillion won at the end of July, increasing by 18.637 trillion won in one month?more than three times the increase in June. This is attributed to a growing number of young people leveraging loans for investment, driven by expectations of rising financial and real estate asset prices despite the spread of COVID-19.

In the stock market, the proportion of new investors?those investing in stocks for the first time among individual investors?rose sharply from 9.3% in 2019 to 32.8% in 2020. More than half of these are young people aged 30 or younger. High-credit borrowers’ unsecured loans also increased noticeably in regions where housing prices surged significantly in 2020.

Im Hyung-seok, a research fellow at the Korea Institute of Finance, advised, "Consumers who relied on low interest rates to pursue excessive leverage should now focus on investment risk management and debt management amid rising interest burdens." He added, "Facing interest rate normalization, it is time to establish rational investment practices based on economic fundamentals within the scope of debt repayment capacity."

This content was produced with the assistance of AI translation services.