More than Half of Household Loans in Korea Now Variable Rate, Increasing Interest Burden

The proportion of variable-rate loans in South Korean household lending has increased by more than 4 percentage points over the past year. This means that more than half of household loans are now exposed to fluctuations in market interest rates. With the Bank of Korea's ongoing trend of raising benchmark interest rates, there are growing concerns that borrowers' interest burdens could escalate significantly if market rates continue to rise.

According to the Bank of Korea on October 11, as of the end of August, the share of variable-rate loans among bank household loans was recorded at 57.3%, up 4.3 percentage points from 53.0% in the same month last year.

The increase in the share of variable-rate loans indicates that a larger volume of loans will be affected by future interest rate hikes. While fixed-rate loans maintain their interest rate for the duration of the contract, variable-rate loans adjust based on market interest rate movements. This means that the risk of increased interest burdens for households during periods of rising rates has also grown.

The rise in variable-rate loans can be attributed to the lower initial rates compared to fixed-rate loans. In August, the interest rate for newly issued mortgage loans was 4.53% for variable rates, which is 0.35 percentage points lower than the fixed rate of 4.88%. This created a strong incentive for borrowers looking to reduce their immediate interest burden to opt for variable-rate loans.

However, the issue is that the trend of rising interest rates is expected to continue. The Bank of Korea raised the benchmark interest rate twice in July and August, and market interest rates are also on the rise. While the possibility of maintaining the current benchmark rate will be discussed at the upcoming Monetary Policy Committee meeting on the 22nd, the potential for further increases cannot be ruled out.

If the increase in market interest rates is reflected in loan rates, the burden on borrowers with variable-rate loans is expected to grow even more. In particular, those who have maximized their loans to purchase homes, known as the 'young-gul' group, could be directly impacted by rising rates. A simple calculation shows that if a borrower takes out a loan of 500 million won and the interest rate increases by 0.25 percentage points, their annual interest burden would increase by 1.25 million won. If the rate rises by 0.5 percentage points, the additional burden would reach 2.5 million won annually.