Steep rate hike feared to deal further blow to borrowers

An advertisement reads, “Personal credit loans, mid-range interest rate loans for employees offered at interest rates of 4.97 to 10.27 percent annually,” at a commercial bank in Seoul, Thursday. Yonhap

By Yi Whan-woo

A sharper-than-expected rate hike in Korea is feared to deal a further blow to borrowers who have already been struggling with a snowballing amount of repayments.

The Bank of Korea (BOK) carried out a second big-step rate hike, raising the benchmark interest rate by 50 basis points, Wednesday, sending the rate back to 3 percent for the first time since October 2012.

Wednesday's big rate increase follows the one in July, and marks the fifth consecutive monetary tightening move since April, with interest payments for both individual and corporate borrowers estimated to rise by 12.2 trillion won.

The increased burden in interest payments comes as household debt in Korea surged to a record 1,869.4 trillion won ($1.33 trillion) in the second quarter of this year.

Correspondingly, 37,727 borrowers were at risk of default and were granted a 50-percent cancellation of the principal through a state-run debt relief program in 2021, up from 19,943 in 2018, 22,404 in 2019 and 31,970 in 2020.

Under the circumstances, those who took out mortgage loans are anticipated to suffer as the annual loan interest rate is forecast to reach a maximum of 8 percent following the BOK's second big-step hike.

The last time the annual mortgage loan interest rate reached 8 percent was during the 2008-2009 global financial crisis.

The rate hike is sharply increasing pressure on young borrowers, many of whom have low incomes and took out bank loans to buy homes back when the base rate was much lower.

Those in their 20s and 30s have been facing increasingly burdensome payments, with their debt amounting to more than 458 trillion won even before the BOK began to restore interest rates to pre-pandemic levels starting in August 2021.

Shim, an office worker at a major business conglomerate in Seoul, bought an apartment in Songpa District three years ago, after borrowing around 500 million won, which includes both mortgage and credit loans. Following the surging interest rate, he is spending more than 20 million won a year to pay back the interest.

“I should have gotten fixed-rate loans, but I never expected the interest rate to rise so steeply. My wife has started working a part-time job to help pay back our loans,” he said.

Small business owners are facing a similar problem.

In a study released a couple of weeks before the base rate was raised to 3 percent, Wednesday, the Korea Small Business Institute forecast that 18.2 percent of self-employed people and micro businesses will be pushed to the verge of default if the rate reaches 3 percent.

The forecast came after a separate study by the institute showed 39 percent ― or 249,342 ― of the self-employed and small business owners nationwide reported that they fell into insolvency at least once during the past five years but kept on running businesses.

The Korea Federation of Micro Enterprise (KFME), an advocacy group representing small businesses, expressed concerns over the BOK's big step interest rate hike.

It argued that the steep hike may have been inevitable, but it raises the chances of insolvency even for businesses that have been performing moderately well.

“We ask the government to come up with enhanced financial support,” it said.