Korean households under heavy debt burden due to massive floating rated loans

[Photo by Kim Ho-young]

Nearly 95 percent of outstanding bank loans to finance South Korean households¡¯ rental deposits were lent out in floating rates as of the end of last year, sparking concerns that many households may fail to pay not only debts but also interests following the Bank of Korea¡¯s second 50-basis point rate hike on Wednesday.

According to documents Financial Supervisory Service submitted to Representative Jin Sun-mee of the liberal Democratic Party on Tuesday, outstanding floating rate jeonse loans totaled 151.5 trillion won ($106.1 billion) as of the end of December last year, accounting for 93.5 percent of the country's entire jeonse loans. This is higher than 83.2 percent in the end of 2019 and 86.7 percent in the end of 2020.

Jeonse is a unique house leasing term in Korea that allows a tenant to rent a house after paying the landlord about 60 percent of the total home price in bulk.

The documents showed that young Koreans are exposed more to floating rate jeonse loans – 61.6 percent or 848,027 out 1,376,802 borrowers as of the end of June were in their 20s and 30s with outstanding amount totaling 94 trillion won.

Concerns rise as the high interest rate environment add more pressure to snowballing household debts.

According to the Bank of Korea (BOK), household loans gained 1.6 trillion won from the previous quarter to 1,757.9 trillion won in the second quarter. Mortgage-backed loans reached 1,001.4 trillion won, up 8.7 trillion won over the cited period.

The BOK on Wednesday delivered a 50-basis-point hike to push the base rate to the decade high of 3.0 percent after its first big step in July.

In such a high interest rate environment, some households are at risk of failing to pay back loans even if they dispose all of their assets.

According to documents submitted by the BOK to Representative Kang Joon-hyun of the Democratic Party, 381,000 households are at high risk in terms of financial debt as of the end of December last year, accounting for 3.2 percent of entire households with liabilities.

A higher interest rate bodes ill to vulnerable households living on what they earn day to day.

Low-income households that belong to the bottom 30 percent in terms of disposable income level are most vulnerable in terms of financial soundness in an interest rate hike environment, Hyundai Research Institute data showed in May.

A 2-percentage point rise in loan interest results to a 3.8-percentage point increase in debt service ratio (DSR) for low-income households to 44 percent from 40.2 percent while 2.4 percentage points for high-incomers in top 30 percent bracket from 29 percent to 31.4 percent.

Self-employed businesses that rely on loans for operations also face hardships.

About 60,000 small businesses may be at risk of going bankrupt if the base rate goes up to 3 percent from 2.5 percent, according to Korea Small Business Institute. This means that the number of businesses that are unable to pay interests with their operating profits would jump from 1.18 million to 1.24 million.

Experts called on the government action to ease debt burden on the vulnerable groups.

[¨Ï Maeil Business Newspaper & mk.co.kr, All rights reserved]