South Korea’s household debt is growing at an alarming pace amid lingering concerns about financial risks that might shoot up depending on a combination of internal and external factors.

The debt service ratio, or DSR, for households in Korea stood at 13.6 percent last year, the second-highest among 17 major countries, the Bank of International Settlements said in a report. Australia ranked first with 14.7 percent DSR.

The DSR is used as a metric by lenders and borrowers to measure the proportion of income that goes towards servicing debt obligations. A higher DSR means individuals have to pay a bigger proportion of their income to pay off the debt.

Equally disquieting is that Korea’s DSR level is increasing at a fast pace. The country’s DSR jumped 0.8 percentage point on-year to reach 13.6 percent last year, the second highest pace after Australia, which posted 1.2 percentage points.

According to the BIS, Korea’s household debt to gross domestic product ratio was 105 percent at the end of last year, the third highest among 43 countries surveyed.

The country’s household debt amounted to 1062.3 trillion won ($842.1 billion) at the end of June, up 5.9 trillion won from May, marking the biggest growth in 21 months, the Bank of Korea said last Wednesday.

The rapid surge came after mortgage loans soared by 7 trillion won in June, the highest gain since 2020, in connection with a steady rebound in the real-estate market as well as a rollback of the past property purchase regulations.

In a report released Monday, the BOK warned that the country’s third-highest household debt in the world could result in a lower long-term growth and a wider gap in wealth distribution should policymakers continue to ignore the problem.

The central bank advised the financial authorities have to reduce the exceptional cases in which DSR loan regulations are not applied, and make it difficult for individuals to take large sums of loans by imposing additional interest rates on the type of interest-only loans.

The most significant characteristic of household debt in Korea is that it is increasing among individuals or households with higher income. While the lower 40 percent income bracket account for only 11 percent of the total household debt, the upper 40 percent income bracket make up for as much as 76 percent of the total.

The BOK said household debt continues to go up because financial institutions, including banks, are actively handling household loans that promise to offer higher profit and yet have relatively low chance of default. Local borrowers, meanwhile, turned to asset investment by taking advantage of prolonged low-interest rates.

The household debt is not a new problem. Policymakers have struggled to tackle the snowballing household debt in the past two decades, but the dominant loan-taking trend linked to red-hot property investment rendered a variety of government regulations ineffective.

Last week, the BOK held the base rate steady for the fourth straight time at 3.5 percent, as the consumer prices, a key gauge of inflation, rose 2.7 percent in June from a year earlier. Price stabilization is a good sign, but it should not be an excuse to take more mortgage loans for speculative investment that could touch off a host of financial problems, including bigger household debt.

BOK Gov. Rhee Chang-yong said in a recent press briefing that household debt is “one of the biggest concerns in the economy” and the central bank will view the soft landing of household debt as a major objective in its monetary policy.

The increase in household debt is not only a trap that limits the growth of the Korean economy, but a potential time bomb that could explode and disrupt the entire financial system.

Policymakers need to take household debt issue more seriously and come up with comprehensive measures that encompass macroeconomic and monetary policies before it is too late to stop the ticking time bomb.