"If the Base Interest Rate Reaches 2% by Year-End... Annual Interest Increases by 3 Million KRW in 2 Years"

Base Interest Rate Hikes to Continue Throughout This Year
Inflation Rate to Peak at 4.5% This Year
Household Finances to Become Even Tighter

[Image source=Yonhap News]

[Asia Economy Reporter Shim Nayoung] The Bank of Korea raised the base interest rate to 1.75% on the 26th, causing the burden of loan interest to swell like a snowball. The base interest rate has been increased five times over nine months since August 2021. There is a high possibility that the rate hikes will continue. The financial sector is confident that the base interest rate will be raised 2 to 3 more times within this year.

Lee Chang-yong, Governor of the Bank of Korea, said at a press conference held immediately after the Monetary Policy Committee (MPC) regular meeting, "We currently judge that the inflation risk is significant," and regarding the market's forecast that the base interest rate will reach 2.25?2.50% annually by the end of the year, he called it a "reasonable expectation." A representative from a commercial bank said, "Since last August, the base interest rate has risen by 1.25 percentage points, and if it goes up 2 to 3 more times, it will have increased by about 2 percentage points in a year and a half," adding, "People who took out mortgage loans of 300 to 400 million KRW will see their annual interest burden increase by several million KRW."

"My salary stays the same, but prices are rising and interest rates are going up... I have no choice but to buy and eat less. I need to cut back on weekend dining out first," said working mom Lee Ji-hyun (41), sighing as she looked at her bank account. When she bought an apartment in Gangbuk-gu, Seoul, in May 2020, she took out a mortgage loan of 300 million KRW (30-year installment repayment, variable interest rate). At first, she paid 600,000 KRW monthly in interest (annual rate 2.45%). The variable interest rate, which changes every six months, had been declining until the first half of last year but started rising in the second half due to the Bank of Korea's base rate hikes. This month, Lee paid 680,000 KRW in interest (annual rate 2.91%).

Lee visited the bank where she borrowed money and asked how much more interest she would have to pay if the rate continued to rise like this. She said, "They told me that including yesterday's base rate hike, if the base rate rises three times by November this year, the annual interest rate will reach 3.66%. The monthly payment will jump to 830,000 KRW." Annually, this means her interest cost is 3 million KRW higher than when she first borrowed money two years ago. "Fuel prices and even my child's academy fees have all gone up; what am I supposed to do..." Her face was full of worry.

A study also showed that if the pace of interest rate hikes accelerates, not only highly leveraged borrowers but also self-employed individuals, who have been struggling due to COVID-19, will have the most vulnerable financial health. The Hyundai Research Institute stated in its report titled "The Impact of Rising Loan Interest Rates on Household Financial Soundness," released on the 22nd, that "If loan interest rates rise by 2 percentage points, the average annual interest cost for self-employed households increases from 4.33 million KRW to 6.43 million KRW, an increase of about 2.1 million KRW," adding, "This increase is significantly larger compared to other employment statuses such as salaried workers."

Self-employed people also agree that "loan interest rates are scarier than quarantine rules." Lee Seung-min (43), who runs a chicken restaurant in Seoul, said weekend sales are less than one-third of what they were at the height of COVID-19. This is because the number of delivery orders has drastically decreased as people started going out. Lee said, "When I opened three stores, I took out loans totaling 150 million KRW from several banks. The interest, which was 300,000 KRW per month at first, has now risen to 650,000 KRW," adding, "When delivery orders were piling up, it was manageable, but now that customers have noticeably decreased, I worry about paying the interest first."