By Yoon Ja-young
Rising interest rates are expected to weigh on marginalized households, which sit on heavy debts. Experts also warn that the debt may end up negatively affecting the country's sovereign credit rating.
According to Bank of Korea (BOK) data submitted to Rep. Kim Jong-min of the main opposition Democratic Party of Korea, a 1 percentage point rise in the interest rate for loans will lead to a 25 trillion won additional burden on "marginalized households."
Marginalized households refer to households with more financial debt than assets, spending over 40 percent of their disposable income to pay back loans. Around 1.5 million households, or 8 percent of the total, were estimated to be in that condition as of last March. They are burdened with 289.7 trillion won in financial debt, taking 32.7 percent of the total.
A simulation showed that a 1 percentage point rise in the interest rate will increase the number of marginalized households by 69,000. The annual interest burden per household also rose by 1.36 million won to 8.91 million won, with their total financial debt rising by 24.7 trillion won to 314.4 trillion won.
The interest rate has been rising during the past few months, with a further hike expected to come following possible key rate hikes in the United States. The interest rate on household loans averaged 3.39 percent last month, marking the highest level in 23 months.
The interest rate at savings banks, which offer loans for those with relatively low credit ratings, stood at 11.75 percent.
Moody's also warned that Korea's rising household debt poses downside risks to economic growth, pointing out that the debt increase is "credit negative" for the country. Its household debt topped 1,300 trillion won as of the end of 2016, a 141.2 trillion won increase from the previous year.
"Households' high leverage raises their vulnerability to falling incomes or rising interest rates, which poses downside risks to consumption and growth," it noted, citing non-amortizing loans and floating-rate loans as threats.
Around 60 percent of mortgages are non-amortizing loans, where households only make interest payments until they reach final maturity. Floating-rate loans also make up around 60 percent of mortgages.
"Income or interest rate shocks, which undermine households' debt-servicing capacity, would likely weigh on consumption. Because household consumption has historically been an important growth driver, this would dampen domestic demand and overall economic activity, and could cycle through to higher unemployment. Higher unemployment would take a toll on household income, further hitting the ability to redeem debt," it noted, adding that sovereign risks are therefore primarily linked to the real economy.
Rep. Kim said that those with low-income, poor credit or multiple loans are of concern as they are likely to have bigger troubles paying back their debts. "The government should pay more attention to the vulnerable households, like senior citizens who typically have real estate but little income."
BOK Governor Lee Ju-yeol said at the National Assembly on Tuesday that the increase in household debt is due to the sluggish economy and poor job market, which negatively affects the income. "Instead of taking short-term measures, the focus should be on attaining continuous economic growth."
Rising interest rates are expected to weigh on marginalized households, which sit on heavy debts. Experts also warn that the debt may end up negatively affecting the country's sovereign credit rating.
According to Bank of Korea (BOK) data submitted to Rep. Kim Jong-min of the main opposition Democratic Party of Korea, a 1 percentage point rise in the interest rate for loans will lead to a 25 trillion won additional burden on "marginalized households."
Marginalized households refer to households with more financial debt than assets, spending over 40 percent of their disposable income to pay back loans. Around 1.5 million households, or 8 percent of the total, were estimated to be in that condition as of last March. They are burdened with 289.7 trillion won in financial debt, taking 32.7 percent of the total.
A simulation showed that a 1 percentage point rise in the interest rate will increase the number of marginalized households by 69,000. The annual interest burden per household also rose by 1.36 million won to 8.91 million won, with their total financial debt rising by 24.7 trillion won to 314.4 trillion won.
The interest rate has been rising during the past few months, with a further hike expected to come following possible key rate hikes in the United States. The interest rate on household loans averaged 3.39 percent last month, marking the highest level in 23 months.
The interest rate at savings banks, which offer loans for those with relatively low credit ratings, stood at 11.75 percent.
Moody's also warned that Korea's rising household debt poses downside risks to economic growth, pointing out that the debt increase is "credit negative" for the country. Its household debt topped 1,300 trillion won as of the end of 2016, a 141.2 trillion won increase from the previous year.
"Households' high leverage raises their vulnerability to falling incomes or rising interest rates, which poses downside risks to consumption and growth," it noted, citing non-amortizing loans and floating-rate loans as threats.
Around 60 percent of mortgages are non-amortizing loans, where households only make interest payments until they reach final maturity. Floating-rate loans also make up around 60 percent of mortgages.
"Income or interest rate shocks, which undermine households' debt-servicing capacity, would likely weigh on consumption. Because household consumption has historically been an important growth driver, this would dampen domestic demand and overall economic activity, and could cycle through to higher unemployment. Higher unemployment would take a toll on household income, further hitting the ability to redeem debt," it noted, adding that sovereign risks are therefore primarily linked to the real economy.
Rep. Kim said that those with low-income, poor credit or multiple loans are of concern as they are likely to have bigger troubles paying back their debts. "The government should pay more attention to the vulnerable households, like senior citizens who typically have real estate but little income."
BOK Governor Lee Ju-yeol said at the National Assembly on Tuesday that the increase in household debt is due to the sluggish economy and poor job market, which negatively affects the income. "Instead of taking short-term measures, the focus should be on attaining continuous economic growth."
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