After the Base Interest Rate Hike... When and How Much Will My Loan Interest Rate Increase?

On the 26th, when the Bank of Korea raised the base interest rate by 0.25% to 0.75% per annum, the commercial district around Gangnam Station in Seoul showed a quiet scene, as the burden on self-employed workers, who have been struggling with debt due to the direct impact of the COVID-19 crisis, is expected to increase. Photo by Kang Jin-hyung

[Asia Economy Reporter Song Seung-seop] Following the 0.25 percentage point increase in the base interest rate, bank loan interest rates are also expected to rise. Since 8 out of 10 loan borrowers use variable interest rate products, the burden of interest payments is expected to increase.

On the 26th, the Bank of Korea decided to raise the base interest rate by 0.25 percentage points to 0.75%. If loan interest rates rise by 0.25 percentage points, household interest burdens will increase by 2.9 trillion won, and if by 0.5 percentage points, by 5.9 trillion won. As there are forecasts that the base interest rate could be raised again within the year, the interest burden is bound to grow.

However, loan interest rates are not expected to rise sharply in the short term. The market has already been under steady pressure from base rate hikes, so much of the increase has been pre-reflected in loan interest rates. Bank loan interest rates are determined by adding market interest rates and spread rates, with the spread rates based on COFIX and financial bond rates rather than the base interest rate.

Nonetheless, if banks respond by adjusting their own spread rates, loan interest rates could rise faster than expected. In this case, it is highly likely that the increase will proceed alongside a rise in deposit interest rates at each bank.

Deposit interest rates at banks are expected to be adjusted soon. Typically, commercial banks raise deposit interest rates shortly after a base rate hike is decided. If deposit product rates such as savings and time deposits rise next month, they will be applied to the October COFIX rate and are expected to lead to an increase in loan interest rates.

For unsecured loans, most products have base interest rates that vary every 6 or 12 months. Overdraft accounts have their interest rates changed annually when the term is extended.

If a mixed interest rate option was chosen, the recent base rate hike may already have been reflected or could be reflected quickly. Mixed interest rates use the AAA-rated 5-year financial bond as the base rate, which fluctuates weekly.

The impact of rising loan interest rates is expected to concentrate on multiple debtors, small business owners, and self-employed individuals. Multiple debtors refer to those who have borrowed from three or more financial institutions. They number approximately 4.23 million, with borrowed amounts exceeding 500 trillion won.

A significant portion of these are self-employed. Due to the economic downturn caused by COVID-19, demand for emergency livelihood funds surged. According to the Bank of Korea, as of the first quarter of this year, loans to the self-employed amounted to 831.8 trillion won. 84% of borrowers simultaneously used both household and business loans.

Experts suggest that during a period of rising interest rates, borrowers should consider switching from variable interest rate products to mixed or fixed interest rate products. For variable interest rate mortgage loans, switching to mixed-rate loans is possible without early repayment fees. Also, for unsecured loans, it is advantageous to choose a 12-month variable cycle to reduce frequent interest rate changes.

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