"How Long Will the Interest Rate Fear Last... Monthly Interest Increased by 300,000 Won in One Year"

Borrowers with 400 Million Won Mortgage Loans in 2020
Last Week's COFIX Rose to 1.72%,
Variable Interest Rates Also Increased to 3.2%
Monthly Interest Up by 300,000 Won Compared to Last Year

BOK Signals Additional Base Rate Hike,
Interest Cost Increases Expected to Continue

[Asia Economy Reporter Shim Nayoung] "At this level, it's a fear of interest rates." Ban Seung-yeon (43, pseudonym), who bought an apartment by taking out a 400 million won mortgage loan from a commercial bank in April 2020, is afraid to look at her bank account. After the COFIX rate rose on the 15th, the new interest rate applied to her loan as of the 18th is 3.2%. The monthly interest payment has become 1,066,667 won. Ban said, "Compared to April last year, the monthly interest alone has increased by 300,000 won. Everyone around me kept saying 'If you don't buy a house now, you'll never be able to,' so I pushed myself to buy, but the house prices haven't risen as expected, only the interest has increased."

Variable interest rates rise sharply... Another hike expected next month

From this week, variable interest rates on mortgage loans at commercial banks have risen sharply. Borrowers who borrowed money by pulling together all their resources during the ultra-low interest rate era over the past 1-2 years are now facing increased repayment burdens. The rise in variable mortgage interest rates is due to the COFIX (Cost of Funds Index), the basis for calculating this rate, jumping from 1.70% (March) to 1.72% (April) on the 15th. On the same day, the Bank of Korea raised the base rate to 1.50%, making it highly likely that COFIX will increase further in May. This means variable interest rates could rise even more next month.

If Ban had taken out a mixed-rate loan (fixed for 5 years, then variable), the situation might have been somewhat better. Two years ago, if Ban had chosen the mixed rate (2.9%), she would have paid a fixed monthly interest of 966,667 won for five years. When she was considering the loan, the variable rate (2.74%) was 0.16 percentage points lower than the mixed rate, so she chose it, but the situation has completely changed. The variable rate, which changes every six months, has continued to rise and now exceeds the mixed rate by 0.3 percentage points.

There will be more than just one or two people in Ban's situation in the future. According to the Bank of Korea's 'Variable and Fixed Interest Rate Loan Proportion,' as of February's new loan issuance, variable rates accounted for 78%, while fixed rates were only 22%. A commercial bank official said, "During a period of rising interest rates, variable rates tend to surpass fixed rates in the long term, increasing loan risks," adding, "The delinquency rate among 'Yeongkkeuljok' (those who borrow to the maximum) may also rise."

Ban's interest expenses are expected to continue rising for the time being. Bank of Korea Governor Lee Chang-yong hinted at further base rate hikes. When asked in the National Assembly whether raising interest rates was appropriate, Lee responded, "As the economy continues to recover and high inflation is expected to persist for a considerable period, it is desirable to operate monetary policy in a way that ensures price stability through appropriate adjustments in the degree of easing going forward."

Even high-credit borrowers face 4% interest rates on unsecured loans

Interest rates on unsecured loans are also rising rapidly. Office worker Lee Mugyeong (33) was shocked by the interest rate when trying to renew her overdraft account at a bank last year and repaid her debt. "My credit score is over 930, but the interest rate, which was in the low 2% range, rose to 4%. As soon as I saw the rate, I paid it all off. I thought I'd earn less than the interest if I borrowed to invest in stocks."

In financial communities, many office workers are complaining about the increased interest burden due to the recent sharp rise. Comments include, "Preferential rates have decreased, and interest has nearly doubled. I need to tighten my belt and prioritize loan repayment," and "By the end of the year, this month's interest rate will look cheap."

The average interest rate on unsecured loans at commercial banks has uniformly exceeded 4% annually. According to the Bankers Association's disclosure on the 21st, the average unsecured loan interest rates in March (excluding low-income financial loans) were 4.17% at Shinhan Bank and Woori Bank, 4.10% at KB Kookmin Bank, 4.09% at NH Nonghyup Bank, and 3.88% at Hana Bank. Even high-credit borrowers with credit scores above 900 are subject to 4% interest rates.

A commercial bank official said, "Considering that rates were in the 2% range last year, the burden consumers feel has increased significantly," adding, "While new loans have decreased due to rising interest, the number of people repaying loans has increased, so household loans are continuously decreasing."

What should more vulnerable borrowers do?

On the 4th, known as 'Ipchun,' which marks the beginning of spring according to the solar calendar, the streets of Myeongdong in Seoul felt bleak. On this day, the government decided to extend the current social distancing measures, which allow private gatherings of up to six people and restrict business operations after 9 p.m., for two more weeks to slow the spread of the Omicron variant of COVID-19. Photo by Moon Honam munonam@

The situation is more serious for vulnerable borrowers. According to the Bank of Korea, although the proportion of vulnerable borrowers in household loans has recently decreased, the rise in loan interest rates has increased delinquency rates among vulnerable borrowers, potentially increasing risks.

According to the Bank of Korea, at the end of last year, vulnerable borrowers accounted for 6.0% of borrowers and 5.0% of loan balances. After peaking at 7.7% and 6.5% respectively in Q3 2018, these figures have declined. The proportion of vulnerable borrowers decreased after government support measures were lifted following COVID-19. However, the fact that vulnerable borrowers are more sensitive to interest rate changes than non-vulnerable borrowers is a risk factor.

The delinquency rate among vulnerable borrowers fell by 1.8 percentage points during the past interest rate decline period (Q2 2019 to Q4 2020) but rose by 1.9 percentage points during the interest rate increase period (Q4 2016 to Q1 2019). Non-vulnerable borrowers showed almost no change in delinquency rates.

Looking specifically at self-employed loans, debt burdens are increasing in line with the interest rate hike trend. According to data submitted by the Bank of Korea to Justice Party lawmaker Jang Hye-young, if loan interest rates rise by 1.0 percentage point, the interest burden for self-employed borrowers (based on debt balances at the end of last year) is estimated to increase by about 6.4 trillion won. As of the end of last year, the total loan balance for self-employed individuals was 909.2 trillion won, a 13.2% increase from 803.5 trillion won a year earlier.

Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "Although the interest burden on vulnerable borrowers will increase, if the current base rate is not raised gradually, it will have to be raised sharply later, which would pose greater risks. The government should quickly start repayments for self-employed borrowers who were granted loan repayment deferrals until September and have the ability to repay, and write off bad debts for those who cannot repay to minimize shocks."

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