[Budget Tightening Households] "With Mortgage Rates Jumping to 6%, Half of My Salary Goes to Principal and Interest... I Stopped Delivery and Subscriptions"

Mr. A purchased an apartment in Suwon early last year. Having worked for six years, Mr. A made what is called a ‘Yeongkkeul’ (meaning pulling together every last bit of one’s soul) last year. To buy the apartment, which was valued at 650 million KRW, he took out a loan of 300 million KRW. He did not expect a large capital gain. He simply judged that it would become increasingly difficult to own a home as time passed. His monthly salary was about 3.5 million KRW. Having taken out a loan at an interest rate in the 3% range, he believed he could repay about 1.2 million KRW monthly in principal and interest, which was roughly one-third of his salary. In reality, it was not a big burden. He considered it as paying for an asset instead of saving through deposits or installment savings.

However, recently, as interest rates have continued to rise, Mr. A’s worries have deepened day by day. The unexpected Israel-Hamas war has added to his concerns, making him closely monitor international oil price trends. Earlier this year, the dominant prediction was that the interest rate hike cycle would end in the second half of the year, but the timing of interest rate cuts has been indefinitely postponed.

With the loan interest rate rising from the 3% range to the 6% range, the monthly principal and interest repayment increased to about 1.7 million KRW. He said, “Even if I somehow endure this, I’m scared that if interest rates rise further, I might have to break the small installment savings I’ve been making.” To repay the increased 500,000 KRW in principal and interest, he started cutting back on consumption. He reduced subscription content services and is trying to avoid stress-induced spending as much as possible. He cut down on delivery food, refrained from meeting friends, and even avoided buying clothes and bags.

The pressure of loan repayments is increasing on the ‘Yeongkkeul’ generation who borrowed heavily to buy homes and build assets. They are feeling the full impact of the interest rate hikes and tightening their belts even more.

According to the Bank of Korea’s Economic Statistics System on the 6th, the interest rate on variable-rate mortgage loans (based on outstanding balance) rose from 3.53% in September last year to 4.72% in September this year. It has increased continuously for two consecutive years since July 2021. The problem is that it is difficult to predict how long the high-interest burden on the Yeongkkeul generation will last. Since the consumer price index’s convergence to the target rate of 2% is uncertain, the timing of interest rate cuts is inevitably delayed. The Monetary Policy Committee stated in its policy direction decision document on the 19th of last month that “the timing for the consumer price inflation rate to converge to the target level is likely to be delayed more than initially expected.”

As uncertainty grows, ordinary investors are also seen cutting back on consumption. Mr. B, who has been investing in coins like Bitcoin Cash and stocks by combining some savings accumulated over the past two years with loans, explained, “I didn’t make reckless loans to invest, but as high interest rates are expected to last longer than anticipated, I have stopped new investments for now and am reducing consumption as much as possible.”

He invested in Bitcoin Cash when it was 1.8 million KRW per coin a year ago, but recently its value dropped to 500,000 KRW, significantly reducing his asset value. With investment asset prices plummeting and a large portion of his salary going toward interest payments, his anxiety has increased, prompting him to reduce consumption first. Mr. B said, “I have cut back on various subscription fees that I regularly paid and am also refraining from cultural activities as much as possible.”

The interest rate on general unsecured loans also rose from 5.29% in September last year to 6.40% as of September this year. Simply put, if someone took out a 10 million KRW unsecured loan, the interest amount increased from 529,000 KRW to 640,000 KRW in one year. For a 50 million KRW loan, the interest burden surged from 2.645 million KRW to 3.2 million KRW. The impact of interest rate hikes inevitably worsens personal financial situations.

As the high-interest rate phase sets in, household loan burdens are also ballooning. Household credit in the second quarter of this year was recorded at 1,862.78 trillion KRW. After gradually decreasing from 1,871.108 trillion KRW in the third quarter of last year, 1,867.5533 trillion KRW in the fourth quarter, and 1,853.2563 trillion KRW in the first quarter of this year, household debt is showing signs of increasing again. Accordingly, commercial banks have started adjusting interest rates. Borrowers’ interest burdens are expected to increase further, regardless of whether the loans are unsecured or household loans.