Hankyungyeon "Loan Structure Changes → Fixed Interest Rate Improvement Needed... Interest Burden Reduced by 800,000 Won"

When Interest Rates Rise by 1%p, Self-Employed Face Annual Interest Burden Increase of 1.6 Million KRW
Structural Change Needed to Convert Variable-Rate Loans to Fixed-Rate Loans

[Asia Economy Reporter Park Sun-mi] A claim has been made that structural changes are needed to convert existing variable-rate loans into fixed-rate loans to alleviate interest burdens during the interest rate hike period. It is analyzed that converting to fixed-rate loans would reduce the annual interest burden per household by 800,000 KRW.

On the 15th, The Korea Economic Research Institute (hereinafter KERI) stated that the debt repayment burden can be lowered through structural changes in loans, such as converting existing variable-rate loans into fixed-rate loans. They argue that reducing the proportion of variable-rate loans and increasing the share of fixed-rate loans would not only reduce households' interest repayment burdens but also decrease the risk of delinquency and default among vulnerable groups, and even have the effect of mitigating economic fluctuations through enhanced macroprudential stability.

As of the third quarter of last year, South Korea's household debt stood at approximately 1,840 trillion KRW, about 96% of the Gross Domestic Product (GDP). Although the growth has slowed due to credit loan regulations, the debt-to-net-disposable-income ratio of households has reached 201%, increasing the risk of debt repayment. Moreover, the 272 trillion KRW worth of loan maturity extensions and interest payment deferrals for small and medium-sized enterprises and small business owners are set to end in March this year, raising concerns about worsening financial stability.

KERI estimated that if the base interest rate rises by 1 percentage point, the annual interest burden on households would increase by a total of 18.4 trillion KRW, with an additional interest cost of 876,000 KRW per household per year. In particular, for the entire self-employed sector, the interest burden is expected to increase by 8.9 trillion KRW annually, or 1.6 million KRW per household per year.

As a solution, they mentioned the necessity of structural changes to convert variable-rate loans into fixed-rate loans. It is analyzed that converting existing variable-rate loans into fixed-rate loans could reduce the total household interest burden by 15.2 trillion KRW annually and lower the interest burden per household by 800,000 KRW per year. For the self-employed, switching to fixed-rate loans could reduce the total interest burden by 7.3 trillion KRW annually, cutting the annual interest cost per household to 1.32 million KRW.

Lee Seung-seok, a senior researcher at KERI, advised, “Rather than focusing on uniform total volume regulations such as the early implementation of the Debt Service Ratio (DSR) to reduce the scale of household debt, it is desirable to prepare fundamental measures to alleviate the actual debt burden of households.” He explained, “Expanding fixed-rate loans would improve the stability of not only the financial market but also the overall macroeconomy by reducing delinquency and default rates among financially vulnerable groups such as low-credit and low-income households, and stabilizing asset values.”

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