Mortgages contained but riskier loans are on the rise

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Mortgages contained but riskier loans are on the rise

Thanks to the government’s tightening of rules on mortgages in late September, borrowing has been cooling off. However, with access to bank loans tightened, many Koreans are turning to lenders charging sky-high interest rates.

In a meeting about household loan management Monday, the Financial Services Commission (FSC) and the Financial Supervisory Service concluded that banks’ lending for real estate has stabilized thanks to the tougher restrictions.

Mortgages taken out in the first 10 months shrunk nearly 41 percent from 44.5 trillion won ($39.5 billion) last year to 26.3 trillion won.

The amount of loans taken out since the beginning of this year are equivalent to 60 percent of last year’s.

But as the government restrictions successfully put a lid on borrowed money for real estate from banks, borrowers - particularly small business owners - have turned to more expensive and riskier loans.

The amount of new non-mortgage loans, including unsecured loans, increased 14.4 percent from 29.9 trillion won in the first ten months last year to 34.2 trillion won this year.

“The growth rate of other loans and borrowing by small businesses and the increasing burden on borrowers are major household debt risks,” said Sohn Byung-doo, the FSC secretary general, who presided over the meeting.

Last month alone, 4.2 trillion won of non-mortgage loans were borrowed from banks, the largest amount in one month since data started being compiled in its current form in 2008.

The situation was the same at nonbanking financial institutions, such as savings banks and cooperatives, which lend at higher interest rates. In Korea, savings banks are similar to consumer finance companies.

Last month, mortgages borrowed from nonbanking financial institutions fell 100 billion won compared to a year ago, while other loans grew 2.8 trillion won.

Full details about these loans, including percentage decreases and increases, will be announced by the Bank of Korea (BOK) later this week.

The government has been worrying about high levels of household debt, especially with the possibility of the Korean central bank raising the key interest rates during the next monetary policy meeting scheduled for Nov. 30.

Any hike in interest rates will make loans more expensive to repay.

As of the second quarter of this year, household debt, including credit card purchases, reached 1,493.2 trillion won, a record amount. Analysts believe this figure will eventually surpass 1,500 trillion won.

The BOK is scheduled to announce the most recent estimated household debt on Wednesday.

Banks have already been raising interest rates on loans.

Despite the BOK freezing its key interest rate for a year, the cost of funds index, which is used as a base rate for new mortgage interest rates, has been rising.

Although banks’ interest rates for mortgages averaged around 3.57 percent, there is speculation in the market that it may go as high as 5 percent.

“[When interest rates go up,] corporate investments and household spending could contract, and there is a possibility of insolvency, especially among those with low credit scores,” said Cho Young-moo, a researcher from the LG Economic Research Institute.

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