[2022-9] Sensitivity of Household Debt to Interest Rates

Articles in Monthly Bulletin
household debt interest rates sensitivity loan mortgage
Research Department(02-759-6827)

Through interactions with asset prices, household debt has accumulated and become a major vulnerability factor of the financial system. As the level of household debt is so high compared to that of income, the burden of debt repayment has been growing. Against this backdrop, an internal or external shock such as a sharp rise in interest rates could negatively affect the economy through adjustment in asset prices and deleveraging pressure. Given the recent steep rise in market rates due to high inflationary pressure, in particular, household debt is expected to be swayed largely by changes in lending rates linked to market rates going forward. Therefore, this paper estimates the level of household debt’s sensitivity to interest rates in consideration of various factors affecting the sensitivity, and draws policy implications based on this estimation.


First of all, this paper calculates interest rate sensitivity through analyses of aggregate and micro data. Changes in household loans have a negative correlation with interest rate movements, and their sensitivity to interest rates is higher during a period of rising interest rates. For borrowers, the higher their incomes and loan-to-income ratios, the more sensitive they are to the movements of interest rates. By loan type, mortgage loans are relatively more sensitive to interest rate movements compared to credit loans. However, other factors that can affect interest rate sensitivity such as the degree of financial imbalances and the proportion of floating rate household debt were not considered in these data analyses. Accordingly, this paper also performs a stricter estimation of interest rate sensitivity using a VAR, panel fixed-effect model in order to consider additional determining factors. Our estimation results show that after the COVID-19 pandemic, the interest rate sensitivity of household debt has risen higher than before. Moreover, if interest rate levels are high, rate rises of the same degree have greater effects in terms of curbing the increase in household loans. By category, the interest rate sensitivity of high-income, highly-leveraged and younger borrowers is estimated to be higher than that of counterparts.


With respect to the estimation of interest rate sensitivity, it is judged that the policy rate hikes which started from mid-2021 not only contributed to reining in household debt growth but also had no small impact on the mitigation of financial imbalances which had been intensified. In this process, however, as for vulnerable groups such as low-income families, the elderly and vulnerable borrowers, whose interest rate sensitivity is relatively low, the effect of curbing growth in borrowing is not so great even if interest rates rise, and their burden of debt repayment could instead grow more significantly. Therefore, in times of intensifying interest rate pressure, the delinquency risk of vulnerable groups could increase, and the asset quality of non-bank financial institutions that extended loans largely to these groups could be undermined. Therefore, while continuing to make policy efforts to ease the buildup of household debt, we need to prepare for the possibility of mounting credit risk among vulnerable groups. 

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