Low-income households to shoulder extra W700b in interest
1%p hike to add W13tr; 2%p hike to add W26tr
Self-employed borrowers face W3.6tr more, mortgage holders W3.7tr more
South Korean households would face an extra 6.5 trillion won ($4.84 billion) in annual interest payments if loan rates rose by 0.5 percentage point, according to a new estimate. The projection comes as the Bank of Korea has raised its benchmark interest rate in consecutive months, deepening concerns over potential defaults among vulnerable borrowers.
The estimate, based on data the Bank of Korea submitted to the office of Rep. Han Chang-min of the Social Democratic Party, a member of the National Assembly's Political Affairs Committee, was released Wednesday. It showed that a 0.5-percentage-point rise in household loan rates would increase households' combined annual interest burden by 6.5 trillion won.
By income bracket, high-income households would pay an additional 4.2 trillion won in interest, middle-income households 1.6 trillion won, and low-income households 700 billion won.
The Bank of Korea's analysis was based on outstanding household loan balances as of the end of the first quarter, calculating how the interest burden would shift under different rate-hike scenarios.
A separate Bank of Korea analysis found that a 0.5-percentage-point rate increase would add 3.6 trillion won to the annual interest burden of self-employed borrowers and 3.7 trillion won to that of mortgage holders. Self-employed borrowers with multiple loans and other borrowers would see their additional interest costs reach 2.1 trillion won and 3 trillion won, respectively.
The household burden grows even more steeply as rates rise further.
A 1-percentage-point increase would raise households' total annual interest burden by 13.1 trillion won. High-income households would absorb 8.4 trillion won, middle-income households 3.2 trillion won, and low-income households 1.4 trillion won. A 2-percentage-point rise would push the total additional interest burden to 26.1 trillion won.
The Bank of Korea's Monetary Policy Board raised the benchmark interest rate by 0.25 percentage point to 2.75 percent in July. It raised the rate again in August, bringing it to 3 percent in consecutive hikes. The board has also signaled the possibility of further increases ahead.
In its Financial Stability Report released in June, the Bank of Korea warned that "a rise in market interest rates could increase financial market volatility and default risks in vulnerable sectors in the short term." It added that "policy authorities must preemptively prepare for related risks to stabilize financial markets while continuing to manage defaults in vulnerable sectors."
kimstar@heraldcorp.com
