Households that have heavily borrowed to purchase homes, known as 'young-gul' households, are particularly vulnerable to rising interest rates. An analysis indicates that if interest rates rise by 1 percentage point, the default probability for these households increases by 0.81 percentage points. Additionally, if one member of the household defaults, the likelihood of other members defaulting is nearly double that of existing homeowners.
The Bank of Korea revealed these findings on September 7 in its issue note titled 'Household Debt Risk Assessment Using Household Database.' According to the central bank's stress test results, a 100 basis point (1 percentage point) increase in interest rates would raise the default probability for high-borrowing households by 0.81 percentage points.
High-borrowing households are defined as the top 10% of households that experience the greatest increase in repayment burden relative to their income when purchasing homes. Considering that the actual default rate for existing homeowners was 2.01% at the end of 2025, this represents a significant increase.
The potential for credit risk transfer within households is also high. In high-borrowing households, if one member defaults, the probability of another member defaulting within 12 months is 8.8%, compared to 4.6% for existing homeowners, indicating a 1.9-fold increase.
Jang Hoon, head of the Financial and Monetary Research Division at the Bank of Korea, stated, "In high-borrowing households, the risk of credit issues spreading beyond the individual borrower to the entire household increases with rising interest rates. Although high-borrowing households only account for about 30% of the lowest income brackets, they experience shocks similar to those of low-income households."
However, when considering all borrowing households, the impact of rising interest rates appears relatively limited. A 25 basis point increase in rates is projected to raise the household default rate from the current 3.35% by 0.27 percentage points. The Bank of Korea assessed that, overall, the default rate remains stable despite rising interest rates.
Interest rate sensitivity is particularly pronounced among low-income households and self-employed individuals. The pre-rate increase default rates for the lowest income brackets (1st and 2nd) were 5.45% and 4.38%, respectively, exceeding the overall average of 3.35%. After 12 months following a rate increase, these rates are expected to rise by 0.48 and 0.40 percentage points, respectively. Self-employed individuals also had a pre-rate increase default rate of 4.47%, which increased by 0.32 percentage points after the rate hike.
The issue of household debt constraining consumption has also been confirmed. A debt service ratio (DSR) exceeding 46% is associated with a decrease in consumption. As of 2025, it is estimated that 11.1% of households with debt had a DSR above this threshold.
Notably, the debt repayment burden has increased among low-income households. The proportion of households in the lowest income bracket with a DSR exceeding 46% rose from 11.4% in 2021 to 14.5% in 2025. Lee Yoon-ha, head of the Household Debt Microstatistics Team at the Bank of Korea, noted, "The debt burden for low-income households is more significant when assessed at the household level rather than the individual level."
The Bank of Korea emphasized the need for a household-level approach to assess and manage household debt risks, considering the income, assets, and debts of all household members. It highlighted the importance of being aware of the default risks associated with rising interest rates for high-borrowing households, the potential for credit risk transfer among household members, and the high debt repayment burdens faced by low-income households.
* This article has been translated by AI.
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