Variable Interest Rate Proportion Hits Highest in 8 Years and 4 Months... Increased Interest Burden for Yeongkkeul Borrowers

Variable Interest Rate Proportion Highest in 8 Years 4 Months
Household Loan Risks Amid Continued Rate Hikes
Significant Portion of Salary Goes to Interest... Pain for Yeongkkeul Borrowers
Interest Rate Hike Speeds in Major Countries Like the US and Europe

Bank of Korea Governor Lee Chang-yong is attending a press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 25th of last month, explaining the base interest rate hike and other matters. [Image source=Yonhap News]

As the Bank of Korea continues its trend of raising the base interest rate, the proportion of variable interest rates in household loans in South Korea is steadily increasing. Considering the pace of rate hikes in major countries such as the United States and Europe, domestic interest rates are also likely to remain high for a considerable period, raising concerns that household interest burdens will significantly increase.

According to the Bank of Korea's Economic Statistics System (ECOS) on the 12th, as of July, the proportion of variable interest rates in household loan balances at deposit banks was 78.4%. This is the highest level in 8 years and 4 months since March 2014 (78.6%). Considering that the total household loans in South Korea amounted to 1,757.9 trillion won as of the end of June, each 0.25 percentage point increase in the Bank of Korea's base rate arithmetically raises the total household loan interest by 3.4455 trillion won.

The share of variable interest rates has recently been increasing further. In June, 81.6% of new household loans at deposit banks were variable rate, which rose by 0.6 percentage points to 82.2% in July. Despite the expansion of economic uncertainty, variable rates are chosen because they are about 0.4 percentage points lower than fixed rates.

As of the 8th, the mixed (fixed) mortgage loan rates at KB Kookmin, Shinhan, Hana, and Woori Banks ranged from 4.450% to 6.426% annually, whereas variable rates (new COFIX-linked) ranged from 4.070% to 6.330% annually. For new borrowers, they must believe that interest rates will rise by at least 0.4 percentage points or more in the future to opt for fixed rates instead of variable rates.

The current outlook expects the rate hike trend to continue. On the 8th (local time), the European Central Bank (ECB) took an unusual 'giant step' (a 0.75 percentage point increase in the base rate) to curb soaring inflation, and the U.S. Federal Reserve (Fed) is also expected to decide on a third consecutive giant step at this month's Federal Open Market Committee (FOMC) regular meeting.

If rate hikes accelerate in major countries, pressure on the Bank of Korea to raise rates will inevitably increase. Even if the Bank of Korea does not immediately return to a 'big step' (a 0.50 percentage point increase in the base rate) policy, it is expected to continue gradual 0.25 percentage point increases at the remaining Monetary Policy Committee meetings this year. If the Bank of Korea raises the base rate to 3% annually by the end of the year, commercial bank mortgage loan rates could exceed 8%.

In the recent 1-2 years of rapid house price increases, those who bought homes or invested through 'Yeongkkeul (borrowing to the limit)' loans are suffering from soaring loan interest rates. As housing prices and stocks decline sharply, anxiety grows as a significant portion of monthly salaries goes toward interest payments. The Bank of Korea plans to supply a 45 trillion won scale of safe conversion loan products by next year to reduce the proportion of variable interest rates, considering that economic uncertainty may increase further.

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