Helping out with loans
The program to convert existing short-term loans with variable interest rates into longer-term loans on fixed rates was met with an overwhelming response. Banks that offered the new loans nearly fulfilled the entire monthly quota of 5 trillion won ($4.53 billion) on the first day. Some bank outlets had to extend business until 8 p.m. because customers waiting to get in the doors exceeded 100. Many of them were asked to come back the following day. The entire annual limit of 20 trillion won is expected to be exhausted by early next week. The financial authority said it won’t budget any more.
The response to the loan program underscores how burdensome debt has become on households. Interest payments alone will reach 40 trillion a year on household debt that has exceeded 1,100 trillion won. The interest will surge upon any rake hike. Since the U.S. Federal Reserve made it clear that it will raise interest rates this year, rates in Korea can also go higher. Danger on the household-debt front is building up.
The loan program is a part of government efforts to navigate a soft landing for the household debt problem. Mortgages in Korea mostly mature over short periods and have to be paid in lump sum after people pay interest at variable rates for a few years. When mortgages are taken out on variable rates, one can get in financial trouble when interest rates rise. The biggest problem with mortgages is that they are structured to be paid in variable rates and with a big lump-sum payment. The new loan program readjusts the existing loans to fixed rates and longer-term maturities so that borrowers can repay both interest and principle in affordable sums every month. The borrowers won’t be hit so hard when interest rates are raised. The interest rate was cut to around 2.6 percent, about 1 percentage point lower than existing rates. Borrowers also need not pay any extra fee for changing loans.
But the loan program is no final solution. The Bank of Korea invested 200 billion won and the Korea Housing Finance Corporation issued mortgage-backed securities to raise funds for the loan program. To expand the program, the central bank and state housing finance agency would have to issue new debt. Banks are not happy because the more they offload loans, the less money they will make. Moreover, the program did not include loans taken out from the non-banking sector, where interest rates are much higher. The non-banking sector loans are a big worry. Borrowers with high interest rate loans need relief more than anyone. The government also must rethink ways to revive the real estate market. JoongAng Ilbo, Mar. 28, Page 26