South Korea’s central bank is expected to raise its benchmark interest rate on July 16, a move that could increase annual mortgage interest payments by an estimated $1.3 billion and place additional pressure on heavily indebted households.
Data provided by the Bank of Korea to Rep. Lee Jong-wook of the People Power Party show that a 25-basis-pointincrease in mortgage lending rates would raise annual interest costs by approximately $1.3 billion nationwide.
The average mortgage borrower would pay about $215 more in interest each year, with annual payments rising from roughly $4,240 to $4,455.
The estimates are based on South Korea’s record $855 billion in outstanding housing-related loans at the end of the first quarter. The total includes home mortgages, jeonse rental loans and group housing loans issued by banks and other financial institutions.
As of the end of April, 35.6% of bank mortgage loans carried variable interest rates, while 64.4% were fixed-rate loans, leaving more than one-third of borrowers immediately exposed to higher borrowing costs.
Economists widely expect the Bank of Korea’s tightening cycle to continue beyond this month’s meeting, with forecasts calling for at least two additional rate increases this year and as many as three or four hikes through next year.
If mortgage rates climb by 50 basis points, annual interest payments would increase by an estimated $2.7 billion. A 75-basis-point increase would raise the additional burden to approximately $4.0 billion.
Under those scenarios, average annual interest payments per borrower would increase by about $430 and $645, respectively, from current levels.
Financially vulnerable borrowers are expected to face the greatest strain. The Bank of Korea defines vulnerable borrowers as those with multiple outstanding debts combined with either low income or weak credit profiles. As of the end of the first quarter, those borrowers held an average mortgage balance of approximately $98,000.
Many already borrow from three or more lenders or credit products, a level generally viewed as indicating limited access to additional financing.
Higher borrowing costs are also expected to affect unsecured consumer loans, including personal loans, overdraft credit lines and loans backed by deposits.
According to the central bank, a 25-basis-point increase in lending rates would add roughly $1.1 billion to annual interest payments on consumer loans. A 50-basis-point increase would raise that figure to approximately $2.2 billion, while a 75-basis-point increase would push the total to about $3.3 billion.
Lee said policymakers should closely monitor rising household debt risks and take steps to ease the financial burden on borrowers as the country enters a prolonged period of higher interest rates.
