South Korean households could pay an additional 6.5 trillion won ($4.7 billion) in annual interest if lending rates rise by 0.5 percentage points, according to an analysis released as the Bank of Korea raised its policy rate for a second consecutive month. Middle- and low-income households alone would account for 2.3 trillion won of that increase.
The data, submitted by the Bank of Korea to Rep. Han Chang-min of the Social Democratic Party, a member of the National Assembly's National Policy Committee, showed the total annual interest burden on households would rise by 6.5 trillion won for every 0.5-percentage-point increase in rates. Han disclosed the figures on the 9th.
By income bracket, high-income households would shoulder an additional 4.2 trillion won. Middle-income households would pay 1.6 trillion won more and low-income households 700 billion won more. Combined, the middle- and low-income brackets account for 2.3 trillion won.
The analysis calculated changes in interest payments at different rate levels based on outstanding household loan balances as of the end of the first quarter of this year.
The burden climbs steeply as rates go higher. A 1.0-percentage-point increase in lending rates would raise total annual household interest payments by 13.1 trillion won, with high-income households paying 8.4 trillion won more, middle-income households 3.2 trillion won more and low-income households 1.4 trillion won more. A 2.0-percentage-point increase would swell the total additional burden to 26.1 trillion won.
A separate central bank analysis found that a 0.5-percentage-point increase would raise annual interest payments by 3.6 trillion won for self-employed business owners and by 3.7 trillion won for mortgage borrowers. Self-employed borrowers with multiple loans would pay an additional 2.1 trillion won, while borrowers with other types of loans would pay 3 trillion won more.
The Bank of Korea's Monetary Policy Board raised the base rate by 0.25 percentage points in July, to 2.75% from 2.50%, then lifted it again last month by the same margin to 3.00%. The two consecutive increases leave the door open to further tightening.
Increases in the base rate do not translate directly into higher lending rates. But market rates typically rise around a policy move, pulling lending rates up with a lag. That means further increases in the base rate could add to household interest costs.
"Separate from the need to raise the base rate to stabilize prices, the interest households actually have to pay grows significantly as rates go up," Han said. "The government and financial authorities must prepare substantive measures to ease that burden, including debt restructuring and financial support, so that it does not fall disproportionately on middle- and low-income households and vulnerable borrowers."
