[Base Interest Rate 1% Era] Soaring Interest Rates Cause Panic Among Households and Self-Employed... Debt Bomb Warning Lights (Comprehensive Report 2)

After Additional 0.25% Point Base Rate Hike
Borrowers and Debt Investors Struggle with Soaring Interest Burdens, Unable to Sleep... Annual Rate Expected to Surpass 6% Soon
Self-Employed Living on Debt Face Chain Bankruptcies Amid Rising Rates and End of Interest Deferrals

[Asia Economy Reporters Jin-ho Kim and Seung-seop Song] As the Bank of Korea raises the base interest rate, the interest burden on households and self-employed individuals is expected to grow like a snowball. With the total household debt limit and rising market interest rates, loan interest rates are rapidly increasing, approaching the 6% annual rate.

The "Yeongkkeul" (borrowing to the limit) group, who took on debt to buy their own homes, and the "Debt Investment" (debt-financed investment) group, who borrowed money from financial institutions for stock and cryptocurrency investments, are struggling with soaring interest burdens. Self-employed individuals and small and medium-sized enterprises (SMEs), who have been surviving on bank loans amid the direct impact of COVID-19, are also facing the risk of business closures and chain bankruptcies due to rising interest rates.

In particular, warnings have emerged that the worsening debt delinquency among vulnerable groups?such as borrowers who could not pass the bank threshold and borrowed from high-interest secondary financial institutions, and multiple debtors who have loans from three or more financial institutions?could become a time bomb for the Korean economy.

According to the Bank of Korea and financial authorities on the 25th, the Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points from the current 0.75% to 1.0%. This adjustment comes three months after the 0.25 percentage point increase in August. After freezing the base rate nine times over a year since July last year, the Bank of Korea abruptly raised the base rate by 0.25 percentage points to 0.75% in August. With an additional 0.25 percentage point increase on this day, the base rate returned to the 1% range for the first time in 20 months.

The interest burden on the Debt Investment and Yeongkkeul groups is expected to increase with this base rate hike. Typically, when the Bank of Korea raises the base rate, loan interest rates rise with a time lag. Additional base rate hikes are forecasted early next year following this increase, which is expected to rapidly push up market interest rates. When the base rate was raised once in August, major loan interest rates surged by more than 1 percentage point at most.

Sighs over Interest Burden of Yeongkkeul and Debt Investment Groups... Concerns over Business Closures for Self-Employed and SMEs

In fact, the average mortgage loan interest rates of the five major commercial banks showed a clear upward trend from 2.76?3.15% in August to 2.87?3.37% in September and 3.05?3.76% in October. The average interest rate on unsecured loans also rose from 2.89?3.14% in August to 3.15?3.58% in October. This reflects the upward trend through average rates, but the actual loan interest rate increase felt by borrowers is much greater. The upper limits of mortgage and unsecured loan interest rates at major commercial banks are already in the mid-5% and high-4% ranges, respectively.

Especially since the Bank of Korea has announced additional base rate hikes early next year, the upward trend in loan interest rates is expected to accelerate. A financial sector official said, "As monetary policy returns to a normalization track, loan interest rates will inevitably continue to rise in a trend for the time being."

The problem lies in the borrowers' interest burden. More than 80% of mortgage borrowers have variable interest rates, and investors who have engaged in so-called Debt Investment through unsecured loans are facing an emergency. For example, a borrower who took out a 300 million KRW mortgage loan in August with a 30-year term at 4% interest would pay 1.43 million KRW monthly, but if the rate approaches 6% within the year, the borrower would have to pay 1.8 million KRW monthly. This means a difference of 300,000 KRW in monthly interest burden within just 3 to 4 months.

According to the Bank of Korea’s ‘Financial Stability Report’ released in September, if the base rate rises by another 0.25 percentage points within the year following the August increase, household interest burdens are estimated to increase by 5.8 trillion KRW compared to the end of 2020.

The situation for self-employed individuals is similar. According to the Bank of Korea, the proportion of variable interest rate loans among self-employed borrowers is estimated at about 67.9%. Although this is lower than the 74.9% variable rate proportion in household loans, considering that the variable rate proportions by industry and sector are not fully reflected, many interpret that the actual impact of the rate hike will be greater.

The average interest rate on unsecured loans for individual business owners at the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 2.78% in the first half of the year. However, last month, the average rate rose by 0.59 percentage points to 3.37%. Despite this, the outstanding loan balance for individual business owners (SOHO) at the five banks reached 297.5334 trillion KRW, the highest ever recorded. It increased by 23.5181 trillion KRW this year alone, and compared to the end of 2019 before COVID-19 (239.4193 trillion KRW), it grew by a staggering 58.1141 trillion KRW. This is interpreted as meaning that many self-employed individuals have increasingly relied on debt to survive after suffering sales shocks due to COVID-19.

When the COVID-19-related financial support measures such as loan maturity extensions and interest payment deferrals end at the end of March next year, the difficulties faced by self-employed individuals are expected to worsen. As of the end of October, 2,495 companies applied for interest deferral at the five major banks, with the deferred interest amounting to 32.6 billion KRW. Considering that there were 1,724 companies and 20.2 billion KRW in the first quarter of this year, the number of companies at the limit is gradually increasing.