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| Bank of Korea headquarters in central Seoul / Korea Times file |
By Yi Whan-woo
An additional hike in key interest rate as hinted by Bank of Korea (BOK) chief is adding to woes of young, low-income borrowers who relied on bank loans to buy homes as well as to invest in risk assets, mainly stocks and cryptocurrencies.
Mostly in their 20s and 30s, such borrowers took out cheap loans over the past couple of years, especially after the pandemic when the BOK sustained near-zero percent interest rates to boost spending and shore up the economy.
Many of them borrowed the money to build wealth in the shortest time possible with intentions to quickly pay back the funds, with the hope of generating huge returns by capitalizing on soaring housing prices as well as the benchmark KOSPI that went past historic 3,000 mark several times in 2021 and global popularity of digital coins.
However, the situation appears to be turning unfavorable.
For instance, the transaction price of apartments in Seoul fell by 0.79 percentage points on average in November in the latest data released by Korea Real Estate Board, a government-affiliated housing statistics research institute.
The KOSPI has been taking a beating this year and closed at 2,890.10, Monday, which is more than 11 percent lower from record 3,305.21 on July 6, 2021.
Concerning virtual assets, the price of Bitcoin, the most popular form of cryptocurrency, dipped by more than 30 percent from November 2021.
Under the circumstance, BOK Governor Lee Ju-yeol's remark, Friday, hinting at another key rate hike is expected to weigh on those burdened with a serious amount of debt.
The remark came after he made the announcement to raise the key interest rate by 25 basis points to 1.25 percent in a bid to grapple with persistent inflation concerns and to normalize protracted loose monetary measures.
The Friday's hike marked the third rate increase since the BOK delivered its first pandemic-era rise in August and ended the era of near-zero interest rate that lasted for almost two years.
It is estimated the BOK will raise the rate up to 1.75 percent this year. Accordingly, the overall household debt will rise by 9.6 trillion won ($8 billion) and individual borrowers are expected to be burdened with an annual extra interest of about 500,000 won on average, according to market observers.
The interest rate on home loans among the five major commercial banks ― KB Kookmin, Shinhan, Hana, Woori and Nonghyup ― vary from 3.8 percent to 5.6 percent ― and can reach 6 percent "in the coming months," according to industry sources.
"And even if the borrowers turn to savings banks, they will still face the burden of an increased interest rate," a source said, noting the rate already reached almost 20 percent, the maximum legal lending rate.
