Bank loan interest rates could reach 14-year high, raising household debt burden

The Korea Times

The Korea Times

Finance

Mon, October 2, 2023 | 02:48

Economy

Bank loan interest rates could reach 14-year high, raising household debt burden

Posted : 2022-09-25 15:41

Updated : 2022-09-26 11:08

A man in Seoul looks at a bank's street banner advertisement that shows the currently soaring loan interest rates. Newsis

By Anna J. Park

With the U.S. Federal Reserve taking giant rate hike steps three consecutive times in a row, local banks' housing loan interest rates are fast approaching a 14-year high ― by the end of the year ― overshadowing the Korean economy's growth potential and looming large in regard to the household debt crisis.

According to the local banking industry, the interest rates of the four major banks' housing mortgage loans range from 4.38 percent to 6.829 percent a year as of mid-September. It's an increase of 0.706 percentage points in two months in the upper band of the interest rate range, as the interest rates from 4.21 percent to 6.123 percent back mid-July this year.

Given that the U.S. Fed is highly likely to take another giant step of raising its rate by 75 basis points in early November, and the Bank of Korea (BOK) is also expected to take a big step of raising its rate by 50 basis points in the next month, the country's interest rates for housing mortgage loans are forecast to near 8 percent by the end of the year.

The possibility of an 8-percent interest rate is quite plausible if the BOK decides to raise its key interest rates by 50 basis points ― two consecutive times in a row in October and in November. It would make local banks' housing loans increase by 1 percentage point, stoking the upper limit of the banks' mortgage loans to some eight percent by the end of the year. In this case, it will be the highest interest rate for housing mortgage loans in 14 years since the global financial crisis in 2008.

Considering the already all-time-high level of household debt in the country, which amounts to 1,870 trillion won ($1.3 trillion) as of the end of June this year, market watchers warn that the speedily increasing interest rates could deal a blow to the Korean economy.

According to the BOK's statistics systems, it is roughly estimated that the burden from the rising interest rates on household debts would increase by some 3.4 trillion won ($2.4 billion).

As small business owners and those who excessively received loans to purchase real estate are expected to be hit the hardest due to the increased cost of interest rates, the government is being urged to come up with policies that reduce their burden.

"It's unavoidable to further raise the country's key interest rates, due to the widening interest gap between the U.S. and Korea. Yet, if the interest rates go up too fast and too much, it could result in a more difficult situation in the longer term, requiring the government to take appropriate policies to soften the shock," Baek In-seok, a macro-financial analyst and senior research fellow at the Korea Capital Market Institute, said.

annajpark@koreatimes.co.kr