A one-percentage-point rise in interest rates would push up the delinquency rate among households that stretched their finances to the limit to buy a home by 0.81 percentage points, according to a new analysis. While average loan soundness across all households is improving, groups carrying heavy repayment burdens remain far more vulnerable to rate swings. The analysis also found that households whose debt service ratio (DSR) exceeds 46% cut back on spending when their principal and interest payments increase.
According to "An Assessment of Household Debt Risk Using a Household Database," released by the Bank of Korea on the 7th, a stress test assuming a one-percentage-point rate increase estimated that the delinquency rate for "highly leveraged home-buying households" would climb 0.81 percentage points after one year.
That is higher than the increase for existing homeowners (0.52 percentage points) or for home buyers who did not take on excessive debt (0.64 percentage points). The researchers classified as highly leveraged those households in the top 10% for the increase in principal and interest payments relative to income among those that took out new mortgages to buy homes between 2023 and 2025.
The key finding is that the same rate shock produces different effects depending on how aggressively a household expanded its borrowing. Households whose repayment burden rose sharply at the time of purchase see their capacity to absorb additional payments erode more quickly when rates go up. That means households that recently bought homes with large loans could be exposed to distress earlier than others as the rate environment worsens.
This rate sensitivity was also pronounced in analysis focused on low-income earners and the self-employed. In a separate stress test assuming a 0.25-percentage-point rate increase, the BOK estimated the overall delinquency rate would rise 0.27 percentage points after 12 months. For households in the bottom income quintile, the increase was 0.48 percentage points, and 0.40 percentage points for the second quintile. Self-employed business owners and corporate representatives also saw a larger shock than the average, at 0.32 percentage points. In short, the less financial headroom a group has, the more vulnerable it is to the same change in rates.
Indeed, even as average household financial soundness has improved recently, delinquency risk concentrated among vulnerable groups has not eased. Average DSR and loan-to-value (LTV) ratios have broadly improved, but the share of borrowing households with at least one delinquent member bottomed out in 2021 and has since turned higher, reaching 3.35% at the end of last year. At the same point, the delinquency rate stood at 5.45% for the bottom income quintile and 4.38% for the second quintile, far above the overall average. For the self-employed and corporate representatives, it reached 4.47%.
The risks of excessive borrowing were also more likely to spread beyond an individual to other family members. In a BOK analysis of households that bought homes between 2021 and 2023, 8.8% of highly leveraged households saw another member fall behind on debt payments within 12 months after the first delinquency. That was 1.9 times the rate for existing homeowners (4.6%), and well above the 5.4% for other home-buying households.
Such repayment burdens also constrain spending capacity, the analysis found. The BOK estimated that once DSR exceeds 46%, an increase in principal and interest payments begins to reduce consumption. Last year, 11.1% of indebted households were above that threshold. Among the bottom income quintile, the share rose to 14.5% last year from 11.4% in 2021. That suggests repayment burdens can squeeze even the spending capacity of vulnerable households.
Experts say the government should refine policy by examining where the risk of distress is concentrated, rather than concluding that household debt risk has receded simply because average indicators have improved. Because repayment burdens on vulnerable households can spill over into delinquencies and weaker consumption, borrowers' capacity to absorb shocks needs to be managed as well.
Kim Jung-sik, professor emeritus of economics at Yonsei University, said tightening only the total volume of lending without addressing the drivers of higher home prices — liquidity, taxation and transport infrastructure — could increase the risk of distress for borrowers who already bought at elevated prices. "Reducing household debt through volume caps does not solve the problem," Kim said.
