BACKGROUND
As of the end of 2013, Korea’s household debt amounted to KRW 1,021 trillion. The government has been taking a series of measures so far to improve the quality of household loan and to rein in the pace of household debt growth. As a result, the government significantly lowered a possibility that household debt issue might be worsened into a systemic risk.
Morgan Stanley(Oct. 2013) evaluated that Korea’s household debt risk is manageable, citing grounds such as financially stable structure of household assets and mortgage rules on loan-to-value(LTV) and debt-to-income(DTI) ratios. The IMF stress test result (Jan. 2014) also shows Korea’s household debt has a low possibility to pose a systemic risk in the event of economic shock.
Despite such achievement, the household debt issue still exposes vulnerability in some parts. The share of floating-rate and interest-only mortgages remains high. Low-income households’ ability to repay debt deteriorated.
The FSC and relevant ministries jointly announced today a package of measures to improve the structural soundness of household debt, as part of the government’s follow-up measures to push forward the three-year plan for the next phase of Korea’s economic growth.
KEY CONTENTS
1. The government will set the ratio of households’ debt to income as a key target indicator in managing household debt and lower the ratio by 5%p until the end of 2017.
2. The government will set new targets for banks to increase the proportion of fixed-rate and amortizing loans out of total mortgages, up to 40% by the end of 2017.
3. The government will prompt banks to offer a variety of loans tailored to consumers’ debt repayment ability such as loans with a cap on floating rates or loans amortized over a mid-term maturity, for example, 5 to 10 years.
4. Borrowers with fixed-rate and amortizing loans will be granted a bigger tax exemption up to KRW 18 million, up from the current ceiling of KRW 15 million. For loans with a long-term maturity, ranging from 10 to 15 years, the government is considering offering tax incentives.
5. Mortgage-backed securities(MBS) issued by the Korea Housing Finance Corporation (KHFC) will be included to s ecurities for the Bank of Korea(BOK)’s open market operation. The MBS will be issued with a single maturity, for example, in June or December.
6. The government will alleviate debt repayment burden for low-income borrowers such as self-employed, small business owners by helping them switch to lower-interest loans and debt restructuring.
7. The government plans to launch a pilot project to help low-income households switch their short-term interest-only mortgages taken out form the non-banking sector to amortizing loans over a longer period of maturity.
EXPECTED OUTCOME
1. Spread out maturity structure of household debt over long-term period
The government will spread out maturity structure of household debt by increasing the share of fixed-rate and amortizing mortgages out of banks’ total mortgages up to 40% by the end of 2017. The longer-term maturity is expected to reduce default risk of household debt and lower a possible systemic risk.
2. Reduce financial consumers’ interest rate burdens
With tax incentives and increased demand for MBS, real interest rate on fixed-rate loans is expected to be lowered, which will push borrowers’ preference towards fixed-rate loans. Household’s risk resulting from a sudden rise in interest rate will be reduced when the proportion of fixed-rate loan s increases.
3. Ease excessive demand for jeonse
By reducing the government’s financial support provided for jeonse home owners with deposit exceeding KRW 400 million, the government expects to narrow the gap in housing costs among home owners, jeonse renters, and monthly renters. The government also expects excessive demand for jeonse to be shifted towards demand for home purchase or monthly rent with various policy measures and incentives.
4. Switch small business owners’ loans to lower-interest loans
High-interest rate loans of a wider range of small business owners will be switched to lower interest ones. Total amount of the switched loans a year will be increased from the current KRW 140 billion to KRW 200 to 300 billion.
Standards for loans entitled to loan switching will be lowered from loans on annual interest rate of 20% to 15%. As a result, the amount of newly-benefited loans is expected to amount to KRW 2.7 trillion.
Debt burden of small business owners will be significantly eased as the interest rate on loans, which currently stands at 15 % or higher, will be lowered to 8 to 12%.
5. Stabilize household debt structure and relieve repayment burdens
It is expected that systemic risk of household debt structure be reduced and household’s repayment burdens be relieved as the proportion of fixed-rate and amortizing loans increases.
*Please read the attached file for details.