Korean mortgage borrowers spend 60% of income paying off debt

[Photo by Kim Ho-young]

People who took out a mortgage to buy a home are spending 60 percent of their income on paying off debt in South Korea, increasing the burden to Asia’s fourth largest economy’s overall financial system with the growing mortgage delinquency rate risk.

Korean household debt service ratio (DSR), or the ratio of total required household debt payments to total annual income, was 60.6 percent in the third quarter ended September, topping 60 percent for the first time in three years, according to data released by the Bank of Korea on Monday.

The figure exceeded 60 percent in the first quarter of 2019 but dipped below the level to the 55 percent range in the first quarter of 2020 due to stricter real estate regulations introduced by the previous government to crack down speculative home buying. The DSR reversed its trend in the third quarter of last year when the country’s central bank began to raise interest rates to tame inflation.

Debt burden grows further for those who have taken out both mortgage and credit loans as their average DSR figure surpassed 70 percent as of end-October.

In general, borrowers whose DSR exceeds 70 percent are classified as borrowers whose income cannot cover the principal and interest payment given the minimum cost of living.

The rising DSR figure means mounting financial pressure on households and their inability to repay debt can cause a crisis in the financial market, the BOK warned.