How Much Will the Interest Burden Per Person Increase if the Year-End Base Rate Reaches 2.5%?

Increase of 1,288,000 KRW in 1 Year and 5 Months

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] As the year-end benchmark interest rate is expected to reach the mid-2% range, loan interest rates are also anticipated to rise sharply. Initially, before this month's Monetary Policy Committee meeting, the market's year-end benchmark interest rate forecast was around 2.25%, but due to the steep inflation surge, the outlook has been raised to 2.50%, increasing the interest burden on vulnerable groups.

According to the Bank of Korea and the financial industry on the 29th, from the borrower's perspective, since the benchmark interest rate hike began in August last year, the additional interest accumulated over about 1 year and 6 months until the end of this year is expected to reach approximately 27 trillion KRW, or 1.3 million KRW per person.

According to the Bank of Korea's household credit statistics, as of the end of March this year, household loans amounted to 1,752.7 trillion KRW. As of the same month, 77% of the total household loan balance at deposit banks was variable-rate loans. Assuming the proportion of variable-rate loans at non-bank financial institutions is the same, if loan interest rates rise by 0.25 percentage points in line with the benchmark interest rate, borrowers' interest burden would increase by 3.3739 trillion KRW (1,752.7 trillion KRW × 77% × 0.25%).

Since the Monetary Policy Committee raised the benchmark interest rate by 0.25 percentage points for the first time in 15 months in August last year, and with three more hikes expected by the end of this year in November last year, January, April, and May this year, the total increase in interest over 1 year and 5 months since August last year is estimated at about 26.9912 trillion KRW (3.3739 trillion KRW × 8).

According to the Bank of Korea, based on the household loan balance as of September last year, if the benchmark interest rate rises by 0.25 percentage points and 0.5 percentage points respectively, the annual interest burden on households increased by 3.2 trillion KRW and 6.4 trillion KRW compared to the end of 2020. The annual interest burden per borrower increased from 2.896 million KRW to 3.058 million KRW and 3.219 million KRW, respectively, an increase of 161,000 KRW and 322,000 KRW.

Based on these results, it is estimated that the increase in interest burden per person due to a 2.00 percentage point rise in the benchmark interest rate (from 0.50% to 2.50%) over 1 year and 5 months will reach 1.288 million KRW. Bank of Korea Governor Lee Chang-yong stated immediately after the Monetary Policy Committee's decision to raise the benchmark interest rate this month, "When interest rates rise, vulnerable groups inevitably face difficulties," adding, "Policy responses are necessary to address the risks faced by vulnerable groups such as small and medium-sized enterprises and self-employed individuals."

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