[Haneun Big Step] Interest per Person Up 330,000 Won... Multiple Debtors, Economic Crisis 'Brain Gun'

Household Debt Hits 1,752.73 Trillion Won... Direct Impact of Interest Rate Hikes
Variable Rates at Highest in 8.2 Years... Banks Raise Rates
Interest Burden Up 1.14 Million Won Compared to Last Year
Multiple Debtors and Yeongkkeuljoek Emerge as Economic Crisis Triggers

Last year, Mr. A, a man in his 30s who purchased a house worth around 800 million won on the outskirts of Seoul through a ‘Yeongkkeul’ (borrowing to the limit) loan, sighed deeply upon the announcement that the Bank of Korea would raise the base interest rate by 0.50 percentage points. He had borrowed about 300 million won using all possible means, including mortgage and personal loans, but the recent rapid rise in interest rates has excessively increased his principal and interest burden. Mr. A is currently using 80% of his monthly salary to repay his debts. If loan interest rates rise as much as the base rate increase, he will have to pay an additional 1.5 million won annually in interest alone. He lamented, "I was prepared, but since house prices are not rising and interest rates are expected to go up further, I feel overwhelmed."

On the 13th, the Bank of Korea implemented a ‘Big Step’ (a 0.5 percentage point increase in the base interest rate) for the first time in history, and household interest burdens are expected to increase significantly. As the central bank responds to soaring inflation with interest rate hikes, low-income households with large loans are increasingly suffering from an ‘interest bomb.’ Especially since the Bank of Korea plans to continue the rate hike trend, analyses suggest that the pain index caused by increased interest burdens could worsen at least until the second half of this year.

Interest per Person Increases by 330,000 Won Due to Big Step

According to the Bank of Korea, the Monetary Policy Committee’s decision to raise the base interest rate by 0.50 percentage points will increase the total household interest burden by about 6.5 trillion won. This is calculated by multiplying the household debt of 1,752.73 trillion won as of the first quarter of this year by the proportion of variable interest rates in bank and non-bank sectors (74.2%) and the rate hike amount. If the Big Step results are applied to variable interest rates later, the average annual interest burden per borrower will increase by 326,000 won.

Since the Monetary Policy Committee has raised rates six times by a total of 1.75 percentage points since August last year, compared to a year ago, the average interest cost per person has increased by 1,141,000 won. Assuming the committee raises rates by 0.25 percentage points in the remaining three meetings this year, pushing the base rate to 3%, the average interest burden per person will increase by as much as 1.63 million won compared to last year. Although there may be differences depending on the timing of individual rate changes and market rate sensitivity, the Bank of Korea expects the average burden to increase by this amount.

Commercial Banks Raising Interest Rates Due to Big Step

In particular, multiple debtors who have borrowed from several sources and Yeongkkeul borrowers have been hit directly. According to the Bank of Korea’s Economic Statistics System, as of May, 77.7% of household loan borrowers chose variable interest rates, marking the highest in 8 years and 2 months. These borrowers are inevitably directly affected by the base rate hike. Many borrowers have already voiced their suffering from interest rate increases on real estate and financial investment communities.

Loan interest rates at domestic banks are rising in anticipation of the Bank of Korea’s base rate hikes. For personal loans, the upper limit interest rate has surpassed 7%. On this day, Shinhan Bank’s ‘Solpyeonhan Jikjangin Daechul S’ recorded a maximum interest rate of 7.36% (1-year financial bond base rate of 3.66% + spread of 3.70%). Hana Bank’s Premium Jikjangin Loan interest rate also reached 7.354% (market rate applied, 1-year maturity). The interest rates on overdraft accounts, which office workers use like emergency funds, have mostly approached the 5% range (based on credit rating 1).

Multiple Debts Exceed 600 Trillion Won... A Time Bomb for the Korean Economy

The problem lies with multiple debtors who have borrowed from three or more places. According to data submitted by the Financial Supervisory Service to Lee Jung-moon, a member of the Democratic Party, the amount of multiple debts was 603 trillion won at the end of last year. This is a 22.8% increase compared to 2017. During the same period, the average loan amount per multiple debtor increased by 16 million won to 134 million won. The number of multiple debtors also rose from 4.17 million to 4.51 million.

Many multiple debtors are in their 20s and 30s who either gathered money from various sources due to low credit or income or attempted Yeongkkeul to pay high housing prices. From the end of 2020 to April this year, delinquent amounts among multiple debtors aged 30 or younger surged by 52.7%. Moreover, a significant number of multiple debtors turned to the secondary financial sector with higher interest rates; the increase in multiple debts at savings banks (73.8%) far outpaced that at banks (31.6%). This is why warnings are emerging that multiple debtors and delinquent borrowers could become a time bomb for the economy and financial markets.

If interest rates rise further, the crisis will deepen. Professor Kim Dae-jong of the Department of Business Administration at Sejong University said, "The U.S. aims for a year-end base rate target of 3.5%, and additional rate hikes are likely. Considering that Korea has maintained a base rate 1 percentage point higher than the U.S., further hikes are inevitable."

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