[Financial Stability Status] Interest Burden Per Person Exceeds 3 Million Won with Additional Rate Hike

Bank of Korea Announces 'Financial Stability Situation (September 2021)'

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] If the Bank of Korea raises interest rates once more following last month, the interest burden per borrower in households is expected to exceed 3 million KRW. The interest burden on self-employed individuals, who increased their debt due to COVID-19, is estimated to rise by 2.9 trillion KRW, and the interest payment burden on companies is expected to increase by 4.3 trillion KRW.

On the 24th, the Bank of Korea stated in its 'Financial Stability Status' report, "If an additional interest rate hike is implemented this year and the base rate rises by 50 basis points (bp) (1bp=0.01 percentage point), the annual increase in household interest burden will be 5.8 trillion KRW," adding, "The annual interest burden per borrower will increase from 2.71 million KRW last year to 3.01 million KRW."

Since borrowers in the top 30% income bracket recently increased their debt significantly for real estate and stock investments, the interest burden on high-income earners is expected to rise substantially. When the base rate is raised by 50bp, the interest burden for high-income borrowers is projected to increase from 3.81 million KRW to 4.24 million KRW. The interest burden per vulnerable borrower is also analyzed to rise from 3.20 million KRW to 3.73 million KRW.

A Bank of Korea official explained, "Vulnerable borrowers have a higher proportion of variable-rate loans at 76.0%, compared to 71.4% for non-vulnerable borrowers, and with the accompanying rise in credit risk premiums reflecting borrower credit risk, loan interest rates are expected to increase significantly." If the base rate rises by 50bp, the average loan interest rate is expected to increase from 3.3% last year to 3.6% this year, while for vulnerable borrowers, the loan interest rate is expected to jump from 4.7% to 5.5%. If the base rate is raised once more, the Debt Service Ratio (DSR) is also expected to rise from 35.9% to 36.3%.

The self-employed, who increased their debt to 858.4 trillion KRW due to the COVID-19 crisis, also face a significant burden. When the base rate is raised by 25bp and 50bp, the interest burden on self-employed individuals is estimated to increase by 1.5 trillion KRW and 2.9 trillion KRW, respectively. By industry, financial soundness is expected to deteriorate among low-income self-employed individuals in accommodation and food services, real estate, and leisure services.

For companies, the increase in interest burden on small and medium-sized enterprises (3.6 trillion KRW) is significantly larger than that on large corporations (700 billion KRW) when the base rate is further raised. In particular, if interest rates remain unchanged, even after the government's financial support measures end, companies' sales are expected to increase as they recover somewhat from the COVID-19 crisis, reducing the number and proportion of vulnerable companies. However, if interest rates rise, there is an analysis that more companies may fall into vulnerability and increase borrowing.

The Bank of Korea believes that while interest burdens may increase to some extent with a base rate hike, raising rates at an appropriate time amid economic recovery could, in the long term, help resolve financial imbalances.

A Bank of Korea official stated, "After examining the debt repayment burdens on households and companies and changes in the resilience of financial institutions due to the base rate hike, it is assessed that households, companies, and financial institutions can bear the burden," adding, "Overall, it is expected that when the base rate is raised, the stability of households, companies, and the financial sector will be maintained, and it will contribute to alleviating financial imbalances in the medium to long term."

However, "For some vulnerable sectors, the risk of insolvency may increase considerably due to the combination of rising interest rates and the end of various financial support measures, so selective policy responses need to be considered," the official added.