Variable Rate Loans Account for 82%... Is a 'Household Debt Bomb' About to Explode?

Variable Rate Loan Proportion Hits Highest in 7 Years 6 Months
Last Month, Top 5 Commercial Banks' Household Loan Balance Nears 700 Trillion Won

[Asia Economy Reporter Kim Jin-ho] As of June, the proportion of variable interest rate loans among household loans reached the highest level in 7 years and 6 months based on new loan issuance. With the Bank of Korea expected to raise the base interest rate soon, warnings are being raised that the astronomical scale of household debt could trigger a financial bomb.

According to Bank of Korea statistics on the 7th, variable interest rate loans accounted for 81.5% of new household loans from deposit banks in June, marking the highest level in 7 years and 5 months since January 2014 (85.5%). Compared to the average proportion of variable interest rate loans in new household loans in 2019 and last year (63.8%, 53.0%), this represents an increase of 20 to 30 percentage points within just 1 to 2 years.

Even based on the total outstanding household loan balance rather than new loans, the proportion of fixed interest rate loans in June (27.3%) was the lowest in 6 years and 9 months since September 2014 (27.2%). This means that 72.7% of the currently outstanding household loans are variable interest rate loans.

The high proportion of variable interest rate loans is a cause for concern considering the rising interest rate environment. The Bank of Korea’s base rate hike is imminent, and the government has repeatedly warned about the possibility of a sharp increase in household loan interest burdens due to rising rates, but borrowers’ choices regarding interest rates have hardly been affected.

This is analyzed to be because the current gap between fixed and variable interest rates is larger than the potential increase in variable interest rates that borrowers can anticipate over the next several years.

In fact, as of the 16th of last month, the COFIX-linked variable interest rate for mortgage loans at the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?ranged from 2.49% to 4.03% per annum. However, the mixed-type (fixed interest rate) mortgage loans, which follow the 5-year bank bond rate rather than COFIX, have interest rates ranging from 2.89% to 4.48%, with both the upper and lower bounds more than 0.4 percentage points higher than variable rates.

The problem is that despite comprehensive pressure from financial authorities, household debt shows no signs of slowing down. According to the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?the total outstanding household loan balance at the end of last month was 695.3082 trillion KRW. This is an increase of 6.2009 trillion KRW compared to 689.1073 trillion KRW in the previous month. The household loan balance has increased for two consecutive months after a slight decrease in May.

The increase in household loans was driven by mortgage loans. At the end of last month, the mortgage loan balance was 489.5837 trillion KRW, up 3.8237 trillion KRW from 485.7600 trillion KRW in the previous month. This is the largest increase this year, surpassing the 3.7579 trillion KRW increase in February. The balance of credit loans also rose by 1.8636 trillion KRW to 140.8930 trillion KRW from 139.0294 trillion KRW in the previous month.

As household loans increase, the financial authorities, which set the household debt growth target at 5-6% for this year, are expected to face considerable pressure in policy management. Since the household debt growth rate in the first half of the year was 8-9%, the growth rate must be managed at 3-4% in the second half to meet the annual target.

However, considering that household loans at commercial banks increased significantly across all sectors, including mortgage and credit loans, last month, there are evaluations that Financial Services Commission Chairman Eun Sung-soo’s statement on the 28th of last month in the “National Address on the Real Estate Market” ? “We will do our best to curb household debt even if it means accepting some criticism and side effects” ? has become meaningless. There are criticisms that achieving this year’s household debt growth target may be practically impossible.