[Interest Rate Hike] Yeongkkeul Clan Panic... Mortgage Borrowers with 300 Million KRW and Credit Borrowers with 100 Million KRW Face Annual Interest Increase of 1 Million KRW+ (Comprehensive)

Base Interest Rate Raised Another 0.25% Point
Yeongkkeul (Borrowing to the Limit) and Bittoo (Investing with Debt) Groups Face 'Interest Rate Tsunami'

[Asia Economy Reporters Kwangho Lee, Sunmi Park, Seungseop Song] Last spring, office worker Kim Seongyu (41, pseudonym), who took out a 300 million KRW loan from a bank to buy a home on the outskirts of Seoul amid rapidly rising housing prices, has been losing sleep lately. The loan interest rate, which was in the 2% range, has rapidly surged to the 6% range. The principal and interest he must repay monthly to the bank increased by 160,000 KRW, or 1.92 million KRW annually. Kim said, "The interest I have to pay every month is already burdensome, and I don't know how I will manage going forward," adding, "To make matters worse, the recent decline in the housing price growth of the house I bought makes me even more anxious."

On the 14th, the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points again, confronting those who borrowed heavily (Yeongkkeul, meaning 'pulling together one's soul') and those who invested with borrowed money (Debt Investment) with a 'tsunami of interest rates.' This is the reality of an 'interest bomb' for people who recklessly borrowed money from financial institutions to invest in real estate, stocks, and cryptocurrencies, complacent with ultra-low interest rates. Self-employed individuals and small and medium-sized enterprises, who have been barely surviving on debt due to the direct hit to sales from the COVID-19 pandemic, are likely to face a critical situation, and low-credit borrowers who mainly use secondary financial institutions such as savings banks and capital companies are expected to suffer even more from the interest rate hikes.

◆Relay of Interest Rate Hikes... Monthly Interest Payments Become Burdensome= According to the financial sector, the fixed interest rates on mortgage loans at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and Nonghyup?rose to 3.78% to 5.54% as of the previous day. Compared to the end of December last year (3.60% to 4.98%), the lower bound increased by 0.18 percentage points and the upper bound by 0.56 percentage points. The variable interest rates on mortgage loans also jumped to 3.57% to 5.07%, and credit loan interest rates reached 3.44% to 4.73%, with the upper bound nearing 5%.

With the Bank of Korea's rate hike on this day, variable interest rates, which are immediately affected, are expected to rise by at least 0.25 percentage points. According to a simulation requested from Bank A, a borrower with a 300 million KRW mortgage loan and a 100 million KRW credit loan will have to pay about 1 million KRW more in interest annually due to this rate hike. Mortgage loan interest increases by about 750,000 KRW per year, and credit loan interest by about 250,000 KRW annually. In a simulation by Bank B, a person with a 200 million KRW mortgage loan and a 50 million KRW credit loan will bear an additional 700,000 KRW in mortgage loan interest and 130,000 KRW in credit loan interest annually, totaling an 800,000 KRW increase.

According to the Bank of Korea, as of the end of November last year, the proportion of variable interest rates in household loans was 82.3%. This means that 8 out of 10 people who took out bank loans are directly affected by the interest rate hikes.

The proportion of variable interest rates was only 53.0% on average annually in 2019, just before the COVID-19 pandemic, but jumped to about 63.8% in the ultra-low interest rate environment in 2020 and exceeded 80% last year. By bank, as of the end of last year, Shinhan Bank had the highest proportion at 78%, followed by Hana (75%), Woori (69%), and Kookmin (46%).

[Image source=Yonhap News]

◆Greater Impact on Vulnerable Groups... Need for Fiscal and Policy Support= The problem lies with those who find it difficult to manage loans and interest payments.

According to the Korea Federation of Savings Banks, 43.7% of savings bank credit loan borrowers last month borrowed money at high interest rates of 16% to 20%. Specifically, the proportion borrowing at 18% to 20% (27.0%) was higher than those borrowing at 16% to 18% (16.6%). As the base interest rate and loan interest rates rise, a significant number of borrowers will have to pay interest at the maximum rate (20%).

Warning signs have also been raised regarding the risk of savings bank borrowers. Currently, 6 out of 10 savings bank credit loan borrowers are multiple debtors who owe money to three or more financial institutions. Among them, multiple debtors who used small emergency loans have higher delinquency rates. There are concerns that if loan interest rates from various financial institutions rise simultaneously, low-income and low-credit vulnerable borrowers could collapse.

Professor Kim Daejong of the Department of Business Administration at Sejong University said, "Even if the base interest rate rises equally, the impact will inevitably be greater on financially vulnerable groups in the secondary financial sector, as well as small business owners and self-employed individuals," adding, "There is no problem with the Monetary Policy Committee raising the base interest rate, but the problem lies in the government's many market-distorting policies."

Moreover, the requirements for the Housing Finance Corporation's policy financial product, the Bogeumjari Loan, have been strengthened, which could increase repayment pressure. Starting today, the Housing Finance Corporation will shorten the verification period for additional home acquisitions related to Bogeumjari Loan applications from every three years to every year. If additional home acquisitions are confirmed during the verification stage, the grace period for selling the house will be shortened from the current one year to six months. The strengthened verification of Bogeumjari Loans is a measure to prevent cases of gap investment misuse in advance.

Experts acknowledge the inevitability of the base interest rate hike but emphasize the need for pace control, especially urging urgent fiscal policy support for vulnerable groups.

Professor Sung Taeyoon of the Department of Economics at Yonsei University diagnosed, "The base interest rate hike is inevitable from the perspective of overall liquidity management and financial and monetary policy." He added, "Instead of trying to block the burden on vulnerable groups caused by the base interest rate hike solely through financial policy, it is necessary to approach it through fiscal policy support," and pointed out, "Support for loan repayment deferrals should also be quickly resolved, and appropriate methods that do not rely on finance should be sought."

Professor Oh Junggeun of the Department of Economics at Konkuk University also advised, "Support for vulnerable groups should be done through fiscal means, but the fiscal situation is not favorable," adding, "Therefore, it is necessary to guide them to appropriately enter stages such as partial debt relief through debt restructuring."