Annual 100 Million Won-Earning Vehicle Owner's Principal and Interest Burden Increased by 2.2 Million Won in 5 Years... "Causing Market Instability"

National Assembly Legislative Research Office '2023 National Audit Issue Analysis'
Household principal and interest repayment burden increasing day by day
Delinquency rates also rising
Need for management such as increasing fixed-rate loans

View of apartments in Seobu Ichon-dong from the 63 Building observatory. Photo by Hyunmin Kim kimhyun81@

The burden of principal and interest repayments on household debt in South Korea has been steadily increasing over the past five years. According to the '2023 National Assembly Audit Issue Analysis' by the National Assembly Research Service on the 31st, the total debt service ratio (DSR), which represents the proportion of annual principal and interest repayments on various financial debts to the annual income of South Korean citizens, has consistently risen since 2018. It was recorded as 12.1% at the end of 2018 → 12.12% at the end of 2019 → 12.3% at the end of 2020 → 12.8% at the end of 2021 → 14.3% at the end of 2022.

The Research Service stated, "It appears that the burden of principal and interest repayments for household borrowers has sharply increased during the recent interest rate hike period. If such an increase in delinquency rates and repayment burdens continues, it could pose a threat to the sound management of household debt." As of the end of March this year, the delinquency rate on household loans at domestic banks was 0.31%, an increase of 0.14 percentage points compared to the same period last year. During the same period, the delinquency rate on household mortgage loans rose from 0.10% to 0.20%, and the delinquency rate on household credit loans increased from 0.31% to 0.59%.

As of the first quarter of this year, South Korea's household debt was recorded at 1,853.9 trillion won. Although this is a decrease of 13.7 trillion won compared to the end of the previous quarter (1,867.6 trillion won), there are concerns that household debt may return to an increasing trend or that the risk of household debt defaults may grow.

The Research Service noted, "According to statistics from the Bank for International Settlements (BIS), South Korea's household debt-to-GDP ratio stood at 105% as of the end of the fourth quarter last year, which is very high compared to other countries," adding, "Research indicates that the critical level of household debt relative to GDP that does not harm economic growth is around 80%." They continued, "Excessive household debt may reduce households' disposable income due to increased principal and interest repayment burdens, leading to a contraction in consumption. If household debt is used for asset purchases, the collateral effect and leverage effect could further amplify economic volatility and trigger financial market instability."

The high proportion of variable-rate loans within total bank household loans was also identified as a risk. This proportion was about 74% as of the first quarter of this year, while fixed-rate loans accounted for 26%. A high share of variable-rate loans means that the burden of principal and interest repayments can increase sharply during periods of rising interest rates.

The Research Service emphasized, "In countries like the United States, France, and Germany, fixed-rate mortgage loans are common," and added, "It is necessary to review the outcomes of measures announced by the Financial Services Commission in May this year, such as easing prepayment penalties to expand fixed-rate loans and imposing additional interest rates on variable-rate loans to sufficiently reflect interest rate fluctuation risks in DSR calculations."

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