Gov’t gets tough on mounting household debt

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Gov’t gets tough on mounting household debt

A coalition of the country’s finance ministry, financial regulator and the central bank announced a new set of measures on Wednesday aimed at curbing borrowing by financially unfit individuals amid record household debt levels. Measures are also expected to encourage earlier repayments of loans and to scale back loans issued by non-banking institutions.

The Financial Services Commission (FSC) said it has raised the target for the share of amortized loans - loans that require principal and interest payment simultaneously - to 45 percent from the previous 40 percent by 2017 in a bid to “strengthen banks’ ability to respond to internal or external shocks.”

As of the end of June, amortized loans accounted for 33 percent of all mortgages issued by banks, as so-called bullet loans, which require only interest payments over an extended period, dominated the market.

In an effort to lift the share of amortized loans, the government will give incentives to banks who contribute to its campaign, offering contribution rates as low as 0.05 percent compared to the maximum 0.3 percent applied to floating-rate bullet loans. When issuing home mortgages, banks are required by regulations to deposit a certain percentage of the loan in the Housing Finance Credit Guarantee Fund managed by the Korea Housing Finance Corporation. This is called a contribution rate.

Banks will also be given extra cuts in their contribution rates - up to 0.06 percentage points per year - depending on their contributions to the government’s target goals. The different contribution rates will be applied from December, according to the FSC.

Banks will also need to gauge borrowers’ credit worthiness based strictly on income rather than the value of collateral or credit card spending. Beginning in January, banks will have to demand documents that verify the borrower’s actual annual income to more accurately assess his or her ability to repay.

From January 2016, new mortgages that are deemed too high for the borrowers based on their incomes will have to be paid back with both principal and interest.

Under current guidelines, loan-to-value and debt-to-income ratios were the main considerations for credit worthiness. The new guidelines are expected to force banks to lend more cautiously and hasten the repayment of principals to lessen default risks.

Meanwhile, it will become more difficult for non-bank financial institutions to lend. The FSC said it will apply more strict evaluation standards for collateral and also tighten loan-to-value ratios for non-residential mortgages (mortgages with land or other commercial facilities as collaterals) from September.

The minimum LTV ratio for non-residential mortgages will be lowered from a current 60 percent to 50 percent, with further cuts likely in the future, according to the FCS.

“The new measure shows the government’s will to manage household debts. Overall, I think the government has done what it could, with the exception of changing debt-to-income ratios,” said Kim Ji-seob, a researcher at the Korea Development Institute.

“The growth of household debt was rather worrisome and the new measures are trying to manage it.”

As of the end of March, household debts reached nearly 1,100 trillion won, as mortgages grew exponentially since the second half of 2014.

Home mortgage lending expanded by 16.6 trillion won from August 2013 to June 2014, while it grew by 59.5 trillion won from August 2014 to June 2015, according to FSC data.

A combination of factors, including some recovery in the local real estate market and a series of interest rate cuts, fuelled the growth.

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