Program aims to offer households some relief from mounting debt

Sixteen commercial banks will launch a new government-designed mortgage program today to help borrowers reduce interest payments as part of efforts to make the effect of the benchmark interest rate cut trickle down to the working class.

The new mortgage offers interest rates between 2.55 and 2.6 percent for terms of 10, 15, 20 or 30 years. That is about 1 percentage point less than prevailing rates.

The Financial Services Commission (FSC), which is in charge of the mortgage program, confirmed rates for the new mortgage and chose banks that will start issuing the loans this week.

The main idea of the new program is to allow those a with floating rate mortgage to switch to a fixed rate guaranteed by the government.

According to the Bank of Korea, the average interest rate of outstanding mortgages in January was 3.6 percent.

In the first trial of the new program, the 16 banks will issue 5 trillion won ($4.5 billion) worth of mortgages at 2.6 percent through April 30.

In the second round of issuances in May, the rate could go lower, if the central bank makes another rate cut.

The total amount of available government-backed mortgages is 20 trillion won per bank this year.

“As the program offers an appealing rate and there are some possibilities that the rate could go down further when the central bank makes another cut, we expect quite high demand,” said an official at the commission. “The FSC is preparing a contingency plan for increasing the amount available.”

The main purpose of the new mortgage program is to trim the cost of household debt that has been soaring since August when the government eased the loan-to-value (LTV) and debt-to-income (DTI) ratios for mortgages in a bid to encourage consumers to homes.

Improving the quality of household debt means the government aims to lessen burdens of households that are feeling the financial pinch because of mortgage payments at the same time that incomes are hardly rising.

One of the major causes of sluggish private consumption despite the government’s economic stimulus package is the burden of mortgage interest on households, the government determined.

FSC Chairman Yim Jong-yong, who held a meeting with experts from private institutions on the country’s household debt problem, said Friday that he will closely monitor the quality of debt.

“The FSC will examine the effect of current government policies on household debt as if undergoing an MRI,” said Yim. “The FTC will scrutinize issuances of mortgages for land and commercial building units.”

Earlier, Yim said that although the rapid growth of household debt is the biggest issue facing the Korean economy, the debt level is not so serious that it can pose a threat to the financial system.

Statistics released by the BOK this month showed Korea’s household debt grew to 746.5 trillion won in January, largely due to a higher mortgage debt, compared with December.

Mortgages accounted for more than half of household debt, up by 1.4 trillion won month-on-month to 462 trillion won, the report said. Non-mortgage loans fell by 800 billion won.

“The LTV and DTI easing was reasonable to stimulate the moribund housing market, and I have no intention of revising the policy for now,” Yim said.

Under the new program designed by the FSC, consumers who borrowed 500 million won at the maximum for a 900 million won house will be able to convert their current loan contracts that demand higher interest at floating rates into a fixed-rate program. Those who borrowed the money at least a year ago are eligible for the program.

As many as 2 million people are expected to qualify for the program. But as the aggregate amount of available funds is fixed at 20 trillion won per bank, not many will actually benefit from the government program.

Because of the limit, many consumers already are making inquiries about the mortgage program, said a manager at a commercial bank.

The FSC chairman said on Monday said the monthly limit of the new mortgages could be expanded, if demand warrants.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]