[Financial Stability Status] If Interest Rates Rise Further, Annual Interest per Person Exceeds 3 Million KRW (Comprehensive)

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

Annual Interest Burden Reaches Approximately 2.86 Million KRW Due to August Rate Hike

With an Additional 25bp Increase, Per Borrower Interest Burden Could Reach 3.01 Million KRW

Bank of Korea: "Selective Support for Vulnerable Groups Needed"

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea, which raised the base interest rate by 0.25 percentage points last month, projects that if it raises rates once more, the annual interest burden per borrower will exceed 3 million KRW.

In its "Financial Stability Status" report on the 24th, the Bank of Korea stated, "If an additional rate hike is implemented this year, raising the base rate by 50bp (1bp = 0.01 percentage points), the increase in households' annual interest burden will amount to 5.8 trillion KRW," estimating that "the annual interest burden per borrower will rise from 2.71 million KRW last year to 3.01 million KRW." Currently, after one rate hike, the interest burden per borrower has increased to about 2.86 million KRW, and if the base rate is raised by an additional 25bp, the per borrower interest burden is expected to exceed 3 million KRW.

Notably, recently, the top 30% income group has significantly increased debt for real estate and stock investments, resulting in a substantial rise in interest burdens for high-income borrowers as well. When the base rate is raised by 50bp, the interest burden for high-income borrowers is expected to increase from 3.81 million KRW to 4.24 million KRW. The interest burden per vulnerable borrower is also projected to rise from 3.20 million KRW to 3.73 million KRW.

A Bank of Korea official explained, "The proportion of variable-rate loans among vulnerable borrowers is 76.0%, higher than the 71.4% for non-vulnerable borrowers, and the risk premiums reflecting borrowers' credit risk are rising simultaneously, increasing the loan interest burden." If the base rate rises by 50bp, the average loan interest rate is expected to increase from 3.3% to 3.6%, while the loan interest rate for vulnerable borrowers is expected to jump from 4.7% to 5.5%. If the base rate is raised once more, the household debt service ratio (DSR) is also expected to rise from the current 35.9% to 36.3%.

Self-employed individuals, who increased their debt to 858.4 trillion KRW due to the COVID-19 pandemic, also face significant interest burdens. When the base rate is raised by 25bp and 50bp, the interest burden for self-employed individuals is estimated to increase by 1.5 trillion KRW and 2.9 trillion KRW, respectively. By industry, financial health is expected to deteriorate among low-income self-employed individuals in accommodation and food services, real estate, and leisure services. For companies, the increase in interest burden for small and medium enterprises (3.6 trillion KRW) was significantly higher than that for large corporations (700 billion KRW). In particular, there is analysis that the number of companies falling into vulnerable states may increase once government financial support measures end.

A Bank of Korea official stated, "Households, companies, and financial institutions are assessed to be able to withstand the rate hikes," adding, "Overall, it is judged that when the base rate is raised, the stability of households, companies, and the financial sector will be maintained, and it will contribute to alleviating financial imbalances in the medium to long term." However, the official added, "For some vulnerable sectors, the risk of insolvency may increase due to the combination of rising interest rates and the end of various financial support measures, so selective responses are necessary."

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