Loan Interest Rate Up 1%P Increases Household Interest by 12 Trillion Won... "Burden on Low-Income Families Grows"

Household Loan Interest Increases by 5.9 Trillion Won with 0.5%P Rise

A loan counter at a bank in downtown Seoul (Photo by Yonhap News)

[Asia Economy Reporter Kwangho Lee] As market interest rates rise, causing loan interest rates at financial institutions to fluctuate, an analysis has emerged showing that even a 1 percentage point increase in loan interest rates would raise the total interest burden for all households holding loans by 12 trillion won.

According to data received from the Bank of Korea by Yoon Doo-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, household loan interest (including mortgage loans and credit loans) increased by a total of 11.8 trillion won when personal loan interest rates rose by 1 percentage point.

The increase in interest by income quintile is 500 billion won for the 1st quintile, 1.1 trillion won for the 2nd quintile, 2 trillion won for the 3rd quintile, 3 trillion won for the 4th quintile, and 5.2 trillion won for the 5th quintile.

Excluding the high-income 5th quintile, the interest burden increases by 6.6 trillion won among low-income and middle-class households.

To estimate changes in interest amounts, the Bank of Korea first divided the total household loan balance (1,630.2 trillion won) as of the end of the fourth quarter last year, based on the proportion of financial debt by income quintile identified in last year's Household Finance and Welfare Survey.

The share of total financial debt in South Korea by income quintile is approximately 3.9% for the 1st quintile, 9.4% for the 2nd quintile, 17% for the 3rd quintile, 25.6% for the 4th quintile, and 44.1% for the 5th quintile.

The Bank of Korea estimated that about 72% of household loans by income quintile are variable-rate loans. If market interest rates change immediately, there is no effect on borrowers who signed fixed-rate agreements, but the interest that variable-rate borrowers must pay increases.

Based on bank loan data and non-bank sector monitoring information, the Bank of Korea estimated the proportion of variable-rate loans at about 72.2% as of the end of the third quarter last year. Although the proportion of variable-rate loans may differ by income quintile, this analysis applied the same rate uniformly across all quintiles.

Using the same method, when interest rates rise by 0.5 percentage points, household loan interest is observed to increase by 5.9 trillion won.

By income quintile, the increases are 200 billion won for the 1st quintile, 600 billion won for the 2nd quintile, 1 trillion won for the 3rd quintile, 1.5 trillion won for the 4th quintile, and 2.6 trillion won for the 5th quintile.

Assuming an interest rate increase of 0.25 percentage points, the total interest increase for all households is analyzed to be 2.9 trillion won. Interest increases by income quintile range from 100 billion won to 1.3 trillion won.