Growing Interest Rate Fears... Borrowers with Over 5% Annual Interest Reach Highest in 8 Years and 7 Months

New Household Loans Account for 11%
Nearly Tripled in One Year

With Increased Jeonse Loans and LTV Relaxation in H2,
Interest Rate Hike Impact Expected to Intensify

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] The proportion of household loans borrowed from banks at an interest rate of 5% or higher reached 11% of the total new loan amount. This is the highest level in 8 years and 7 months. Amid concerns over economic recession and high inflation, interest rates are soaring, increasing the burden on households.

According to the Bank of Korea's Financial Statistics System's 'Proportion of Household Loans by Deposit Bank Interest Rate Level' (based on new loan amounts) as of April this year, the share of household loans with interest rates of 5% or higher reached 11%. Just a year ago, it was only 4.1%, nearly tripling since then. This is the highest figure since September 2013, when it hit 12.1%.

On the other hand, the share of low-interest household loans has sharply decreased. The proportion of household loans with interest rates in the 2% range shrank from 75.4% to 13.7% within a year. Instead, the 3% range increased from 17.3% to 53.9%, and the 4% range rose from 3.2% to 21.4%. A commercial bank official said, "During the period of rising interest rates, both mortgage loan interest and credit loan interest have increased, causing significant changes in the loan proportions by interest rate level," adding, "If the Bank of Korea takes a big step in July, the proportion of borrowers with loans over 5% will continue to grow."

The ripple effect of the interest rate hike is expected to intensify in the second half of the year. Although the balance of household loans at commercial banks decreased in the first half of this year (January to May), the number of people visiting bank counters to borrow money may increase starting in July. This is because, with the second year of the implementation of the three lease laws, the expiration of the right to request contract renewal is approaching, which is expected to increase jeonse loans. Signs of an increase in mortgage loans are also emerging. Starting next month, the Loan-to-Value ratio (LTV) applied to first-time homebuyers will be raised from 60-70% to 80%.

A financial sector official said, "Due to housing policies, households will need to take out loans in the hundreds of millions of won, so there will be a turning point when the overall household loans return to an increasing trend," and added, "New borrowers will have to bear the risks associated with the interest rate hikes as they are."

The fact that the choice of variable interest rates remains high is also increasing interest rate risk. According to the Bank of Korea, despite the high possibility of further base rate hikes, the proportion of variable interest rate loans among household loans (based on new loan amounts) in April rose by 0.3 percentage points from the previous month (80.5%) to 80.8%. This is the highest level since December last year (82.1%). Variable interest rates are currently lower than fixed rates, but since the interest rate applied changes every six months according to the base rate fluctuations, borrowers' interest burdens increase. The Bank of Korea and the financial sector expect the year-end base rate to be between 2.25% and 2.50% per annum.

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