One in three household borrowers in their 40s spends more than 40% of annual income on debt repayments, according to central bank data. With repayment burdens heaviest among lower earners, analysts say further increases in lending rates could squeeze household spending.
Housing and Education Costs Press Borrowers in Their 40s
Of household borrowers in their 40s, 34% had a debt service ratio (DSR) of 40% or more in the second quarter of this year, according to parliamentary audit data submitted by the Bank of Korea to Rep. Kim Nam-joon of the Democratic Party of Korea, a member of the National Assembly's Finance and Economic Planning Committee, on Oct. 13.
The central bank calculated the share of high-DSR borrowers by age group using its household debt database, which covers credit information on about 2.35 million people. The DSR measures the portion of annual income that goes toward repaying loan principal and interest. A borrower earning 50 million won ($34,900) a year with a DSR of 40% must put 20 million won ($14,000) toward repayments annually.
The share of high-DSR borrowers in their 40s fell to 33.9% in the first quarter of this year from 36.3% in the first quarter of 2024, before edging back up to 34% in the second quarter. By age group, the ratio was 29.6% for those 60 and over, 29.2% for those in their 50s and 24.4% for those 39 and under. Only borrowers in their 40s exceeded 30%. The pattern is seen as reflecting the concentration of home purchases and child-rearing and education costs in that stage of life.
Low-Income Burden Now Exceeds That of High Earners
The gap by income was also pronounced. Among low-income borrowers, defined as the bottom 30% by income, 40.4% had a DSR of 40% or more in the second quarter. That compares with 26.7% for middle-income borrowers and 26.3% for high-income borrowers, the top 30% by income — 13.7 percentage points and 14.1 percentage points lower, respectively.
The gap between low- and high-income borrowers widened to 14.1 percentage points in the second quarter from 11 percentage points in the first quarter of 2024. At that time, the figures were 40.7% for low-income borrowers and 29.7% for high-income borrowers, indicating that repayment pressure on lower earners has barely eased while the burden on higher earners has declined.
Further rate increases could add to the strain on households, according to the data. Borrowers on floating-rate loans in particular face higher interest costs that could leave them with less money to spend.
Based on outstanding household loans at the end of the second quarter, the Bank of Korea estimates that a 0.25 percentage point rise in rates would increase total annual interest payments by 3.4 trillion won ($2.4 billion), or an average of 170,000 won ($119) per borrower. A 0.5 percentage point increase would add 6.7 trillion won ($4.7 billion) in total interest payments and 340,000 won ($237) per borrower.
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