Value context and insight. lkm@koreatimes.co.kr
Leveraged borrowers face higher interest burdens as market rates inch up
The lobby of a bank in Seoul / Yonhap
By Lee Kyung-min
An increasing number of leveraged borrowers are struggling with rising debt repayment costs, pressured by market rates inching up due to fading expectations for the central bank's monetary easing amid a rapidly weakening Korean currency and elevated housing prices, market watchers said Monday.
Even high-credit borrowers are now finding it difficult to secure credit at rates below the mid-5 percent range. Overdraft accounts, widely used for short-term financing, have also become more costly.
Many say financing costs are likely to tick up, influenced by more lenders tightening lines of credit amid the government drive to curb household debt.
According to financial market data, borrowing rates on unsecured loans at Korea’s five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at a range of between 3.79 percent to 5.31 percent as of Friday, up by as high as 0.25 percentage points from the first week of this month.
Overdraft loans, which charge about 0.5 percentage points higher than unsecured loans, charge at least 4 percent. This has led to a rapid increase in interest burden.
The unsecured loans extended by the five banks reached 106.1 trillion won ($71 billion) as of Thursday, up 1.38 trillion won in just the first 20 days of the month.
“We have been revising interest rates upward in response to higher market rates,” a Hana Bank official said. “Yields on one-year bank bonds are rising, pressuring many lenders to adjust the rates accordingly. The rates are likely to rise next month, as indicated by higher benchmark market rates inching up this month.”
This tightening in borrowing conditions is not limited to the unsecured loan market.
Mortgage rates have risen sharply in response to higher five-year bank bond yields and stricter household borrowing regulations.
As of Nov. 17, fixed-rate mortgage rates based on five-year bank bonds stood at between 3.93 percent and 6.06 percent at the major banks, up roughly as high as 0.25 percentage points from early this month. Floating rates on mortgages ranged from 3.77 percent to 5.97 percent.
The higher interest rates strain households in the form of higher debt repayment burdens, according to former Seoul National University economist Lee In-ho.
“Highly leveraged borrowers face greater repayment risks, particularly those with floating rate loans that fluctuates frequently. These not only increase the likelihood of delinquencies among vulnerable borrowers but also erodes overall household purchasing power amid slow income growth, leading to weakening consumption," Lee said.