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Government Discusses Measures on Rising Household Debt and Mortgage Policies

Photo by Emanuel Ekström / Unsplash

Seoul, South Korea - To address concerns about rising household debt, the Financial Services Commission convened with relevant government agencies to develop and announce a structured approach to managing escalating household debt.

Why it matters:

Household debt hit a record KRW 1,075.0 trillion (US$809 billion) at the end of August, led by mortgages, which rose the most since February 2020, according to the Bank of Korea.

Rising household debt is one reason the Bank of Korea has maintained a tightening bias while restricting its benchmark interest rate.

The Key Points

What is happening in the market?

  • Recovery spurs debt: Housing transactions increased in July and August, increasing household debt. A notable driver was the banking sector's aggressive rollout of 50-year mortgages, a tactical response to the prevailing market competition.
  • 50-year mortgages under scrutiny: The appeal of 50-year mortgages lies in their potential to circumvent debt service ratio (DSR) rules that could encourage inappropriate lending or speculation in the housing market. Recognizing the associated risks, officials stressed the need for better supervision of such long-term mortgages.
  • The Special Bogeumjari Loans: Amid rising interest rates, applications for special Bogeumjari loans slowed. The consensus at the meeting was clear: such loans should prioritize lower-income segments and genuine homebuyers, away from speculative lending.

Key measures introduced:

  • Tightening of mortgage guidelines: The government is moving quickly. New two-pronged measures are being introduced to guard against the circumvention of lending rules, particularly for 40- or 50-year mortgages.
  • The main pillar is transparency - lenders must strictly adhere to the principle of lending within a borrower's actual ability to repay. Banks must now exercise greater caution, particularly for 50-year mortgages, to ensure that lending practices remain tight.
  • Regulatory oversight has been strengthened: A dual-focus approach addresses household debt's quantitative and qualitative aspects. Given the potential for future interest rate increases, DSR rules will be tightened, especially for variable-rate loans. In addition, specialized banks offering large volumes of 50-year mortgages will be closely monitored to ensure compliance.
  • The role of financial supervisors will be strengthened: Banks with large household loan portfolios are now under the radar. In its enhanced role, the Financial Supervisory Service will look closely at the lending practices of such banks and recommend corrective action where necessary.

What comes next?

Tightening of eligibility for the Special Bogeumjari loans: As of September 27, new eligibility norms will be implemented.

Those whose annual income exceeds KRW 100 million or who purchase real estate valued between KRW 600 million and KRW 900 million will be excluded.

However, the preferential Special Bogeumjari loans will remain accessible to low-income families and genuine home buyers.

At the meeting, FSC Secretary General Lee Se-hoon spoke about the importance of strictly adhering to the principle of lending within the borrower's repayment capacity to ensure effective household debt management.

In this regard, Secretary General Lee urged close cooperation from the banking sector and said that the authorities will work to improve and prepare relevant regulations.