Household debt risks are new focus of governmentWith household debt in Korea growing at a slower pace, the government is now trying to address the related risks.
Measures to accomplish this include reducing loans made by a state-run provider and increasing the share of fixed-rate loans, which are considered less vulnerable to rising interest rates than variable-rate loans.
In a press briefing Monday, Choi Jong-ku, chairman of the Financial Services Commission (FSC), the country’s financial regulator, said the government will reduce the amount of mortgages known as conforming loans by as much as 1 trillion won ($930.7 million).
A conforming loan refers to the mortgage provided by the Korea Housing-Finance Corporation, a state-run housing loan provider. It is a long-term, fixed-rate mortgage and local banks issue the loans on behalf of the Korea Housing-Finance Corporation.
Last year, 12 trillion won worth of conforming loans were made available by the Korea Housing-Finance Corporation. The amount will be reduced to 11 trillion won this year, Choi said.
Of the 11 trillion won, 5 trillion will be distributed to banks based on the amount of covered bonds they issue.
Covered bonds are securities backed by a pool of assets known as a “cover pool.”
The government also raised its target for fixed-rate loans issued by the bank from 45 percent of all loans in 2017 to 47.5 percent by the end of this year.
The government prefers fixed-rate loans over variable-rate loans because the cost of paying the latter gets higher when interest rates rise, putting borrowers at risk.
Interest rates charged by Korean banks change depending on the benchmark rate by the United States government.
The U.S. benchmark rate has already surpassed the base rate of Korea after the U.S. Federal Reserve pushed up the rate by 0.25 percentage points from 1.50 to 1.75 percent last month.
“The burden of payment will worsen as major economies such as the United States normalize their monetary policy,” Choi said. “In the banking industry alone, more than half of the loans issued are variable-rate loans, meaning borrowers can easily be exposed to risks stemming from changes in interest rates.”
The debt-service ratio evaluation, which is a tougher model than the previously used debt-to-income ratio model, will also be fully implemented on loan applications across the nation starting in October.
The model compares all of a potential borrower’s outstanding debt obligations, instead of just mortgages, to the borrower’s income in order to figure out his or her ability to pay back the loan.
At the moment, the model is being tested by local commercial banks.
Korea’s top financial regulator hopes that these measures will keep the growth of household debt in the country at a moderate pace.
Household debt in Korea is considered a ticking bomb for the economy, reaching 1,450.9 trillion won as of last December.
Choi said the government’s recent efforts to curb household debt have paid off. The government introduced a number of policies last year, including the household debt-tightening measure implemented last October that targeted owners of more than one home.
“The amount of increase [in household debt] fell by 31 trillion won last year,” Choi said.
According to data by the FSC, household debt in Korea rose by 108.4 trillion won in 2017 whereas it expanded by 139.4 trillion won in 2016.
Choi further explained that the rate of growth for the year was 8.1 percent, the first time in three years that the figure was below 10 percent. The government’s long-term goal is to keep the growth rate lower than 8.2 percent.
“This bears a significant meaning,” Choi explained. “The government will try to keep the rate below 8.2 percent again this year.”
BY CHOI HYUNG-JO [email@example.com]