As the Bank of Korea signals a potential increase in the base rate, household debt is emerging as a major variable in the financial market. While there is a prevailing view that tightening measures are necessary to combat high inflation and exchange rates, concerns are growing that the burden will disproportionately affect vulnerable borrowers and those who have maximized their borrowing capacity.
On June 18, financial sector reports indicated that the fixed-rate mortgage rates from the five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—ranged from 4.32% to 7.37%. This marks an increase of over one percentage point in just six months, despite no changes to the base rate since the beginning of the year, when the upper limit for fixed rates was around 6.2%.
This rise in mortgage rates is a preemptive response to expectations that the Bank of Korea will raise the base rate in the second half of the year. The benchmark for fixed-rate mortgages, the five-year financial bond rate, increased from 3.497% on January 2 to 4.207% on June 17.
The impact of rising rates is expected to hit multiple borrowers and low-income households the hardest. The Bank for International Settlements (BIS) has analyzed that households with high levels of debt tend to adjust their consumption more significantly in response to interest rate changes, amplifying the effects of monetary policy. This means that the burden from rate hikes could extend beyond just increased interest costs, potentially affecting consumption and the overall economy.
In fact, vulnerable borrowers are likely to experience greater shocks from rising rates, particularly in conjunction with high inflation, leading to increased delinquency rates and reduced disposable income. Consequently, financial authorities are continuously monitoring the repayment capabilities of these borrowers as a key risk factor amid rising household debt.
Those who have maximized their borrowing capacity are also feeling the strain from rising rates. During periods of increasing interest rates, mortgage interest payments rise, and a slowdown in real estate price growth could simultaneously diminish asset values and cash flow. Borrowers who have taken on maximum loans to purchase homes in recent years, despite high property prices, are particularly sensitive to interest rate fluctuations.
Investors using leverage for debt investments are also expected to face increased burdens. As of June 15, the balance of overdraft loans from the five major banks stood at 43.386 trillion won. With credit loan rates already exceeding 6%, rising loan rates could lead to heightened interest burdens and increased market volatility.
A financial sector official stated, "The market has already largely priced in the anticipated base rate increase, but if the increase actually occurs, borrowers' interest burdens will rise even further. Particularly for vulnerable borrowers, a significant portion of their income is often allocated to principal and interest repayments, so even a modest increase in rates can feel much more burdensome."
* This article has been translated by AI.
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