As the Bank of Korea picks up the pace of interest rate increases, analysts expect strains on households and businesses outside the safety net to widen quickly. Household loan burdens are mounting, and delinquency rates among small businesses and the self-employed also need to be managed, observers said.
Five-year fixed mortgage rates at South Korea's five largest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — ranged from 4.72% to 7.17% as of the 28th, according to financial industry sources. That marks an increase of 0.79 to 0.94 percentage points from the end of December, when the range was 3.93% to 6.23%. Floating mortgage rates stood at 4.20% to 6.55%, up 0.50 to 0.85 percentage points from 3.70% to 5.87% at the end of December.
Market watchers say the upper end of fixed mortgage rates could exceed 8% this year. Yields on five-year financial debentures, the benchmark for fixed-rate mortgages, turned higher again after a month and topped 4.4%. The Cost of Funds Index (COFIX) for July also reached 3.18%, its highest level in 19 months.
Should mortgage rates climb above 8%, the burden on borrowers would rise sharply. A borrower taking out a 300 million won ($216,000) mortgage over 30 years with equal monthly payments of principal and interest would pay 2.2 million won a month, of which more than 2 million won is interest alone.
Borrowers who already have loans would also face heavier costs. The Bank of Korea estimates that a 0.50 percentage point rise in lending rates would swell interest payments by 3.7 trillion won. Average interest costs per borrower would increase by 592,000 won.
The problem is that household debt is growing rapidly alongside investment in property and stocks. Household credit outstanding stood at 2,019.8 trillion won at the end of June, rising 25.9 trillion won in three months and surpassing 2,000 trillion won for the first time. Household loans across the financial sector grew 6.2 trillion won last month, and with regulators raising this year's target for household loan growth to 3.0% from 1.5%, the increase is expected to continue for some time.
Delinquency rates have risen steadily amid weak domestic demand and higher prices and interest rates in the first half. The delinquency rate on won-denominated bank loans was 0.56% in June, the highest for the month of June in 10 years, according to the Financial Supervisory Service, compared with 0.71% in 2016. The delinquency rate for the self-employed was 2.04% at the end of March, the highest since the end of June 2015.
