Loan Rates Rise Again, Vulnerable Borrowers and Small Business Owners on Alert

South Korea's Bank of Korea has signaled the start of a tightening cycle, raising concerns among borrowers. With mortgage and credit loan rates already hovering between 6% and 7%, further increases could heighten the risk of defaults, particularly among vulnerable borrowers and small business owners.

As of June 2, the five major banks (Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) are offering fixed-rate mortgages with interest rates ranging from 4.34% to 7.32%. Some banks have already seen their lower rates exceed 5%.

Market analysts predict that if the Bank of Korea raises the benchmark interest rate by 0.25 percentage points up to three times this year, the upper limit for mortgage rates could surpass 8%. This is due to the correlation between benchmark rate hikes, rising bank bond rates, and increased funding costs, which ultimately affect loan interest rates.

The burden is expected to fall heavily on borrowers exposed to interest rate fluctuations. Those who took out loans five years ago during the peak borrowing period with mixed rates and are now switching to variable rates, as well as those with six-month variable loans, are particularly at risk. For instance, a borrower who took out a 400 million won loan at a 5% interest rate with a 30-year equal principal and interest repayment plan would see their monthly payment rise from approximately 2.14 million won to about 2.93 million won if rates increase to 8%, an increase of around 800,000 won.

The challenges for vulnerable borrowers are intensifying. The number of individual business owners registered as financial defaulters surged from 67,900 in 2022 to over 120,000 in April this year. The delinquency rate for loans to individual business owners from domestic banks has also reached its highest level in five years. As the economic difficulties for small businesses and self-employed individuals worsen, the number of personal bankruptcy filings has risen to its highest level since 2021.

Borrowers with credit loans are also facing uncertainty. Amid a booming stock market, the trend of borrowing to invest, known as 'debt investment,' has led to the highest level of personal credit loan balances at the five major banks since November 2023. The upper limit for credit loan rates at major banks has already reached around 6%, raising concerns about increased default risks if rates continue to rise.

Rising interest rates also pose challenges for banks. If borrowers' repayment abilities decline, financial institutions will need to bolster their loss absorption capabilities by increasing provisions for bad debts.

A financial industry official stated, "If the defaults among small businesses and self-employed individuals worsen, it could lead to a vicious cycle of domestic economic stagnation. Policy measures are needed to ensure that the impact of interest rate hikes does not disproportionately affect vulnerable borrowers and marginal businesses."