FSC to tighten mortgage rules to curb rising household debt

The Financial Services Commission plans to implement stricter rules on mortgage lending to address the surge in household debt driven by an increase in housing-related loans.

ATMs of different banks installed in Seoul on Aug. 6. [NEWS1]

Financial regulators will strengthen measures against the rapid growth of household debt, as its growth rate jumped to a record level along with a recovery in housing transactions.

Household debt extended by banks soared at the fastest pace in 25 months in August, rising 6.9 trillion won ($5.2 billion) from a month earlier to 1,075 trillion won, according to data by the Bank of Korea.

The rise in household debt was led by housing-related loans, despite a slowed demand for jeonse (lump-sum deposit), said the central bank.

Loans for jeonse retreated for two consecutive months through August.

On-month corporate loans extended by banks expanded to 8.2 trillion won in August, compared to an increase of 8.7 trillion won a month earlier.

A rapid increase of household debt was one of the concerns by the financial authorities, including the central bank, which has held its policy rate at a restrictive level. The International Monetary Fund also said last Wednesday that “continued efforts are needed to contain financial vulnerabilities related to the real estate market and high household debt.”

The Financial Services Commission (FSC) said that it will tighten rules on mortgage lending with a 50-year maturity, which started to be offered this year, to tackle the rapid growth of household debt.

The FSC said that it will strengthen monitoring of the types of borrowers that are allowed to receive the mortgage, which became popular as it reduces their monthly interest payment and expands loan extension which is currently restricted by the debt service ratio (DSR).

DSR is the ratio of interest payment plus amortizations to income.

The FSC criticized banks for not preemptively taking measures to control household debt, saying the 50-year maturity mortgage should have been selectively extended to borrowers based on their repayment ability.

Of the total debtors that took out the 50-year maturity lending, 57.1 percent were those in their 40s and 50s and 12.9 percent were aged 60 or above. Debtors in their 20s and 30s only accounted for 29.9 percent.

“We’ve agreed that thorough management over household debt is needed to make sure the future growth of household loans does not expand,” said the FSC in a statement following a meeting held at the government complex in central Seoul.

It was attended by officials from related organizations, including the Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport and the Financial Supervisory Service.

The regulators also plan to adopt a stress DSR, which reflects the potential adjustment of interest rate when calculated.

BY JIN MIN-JI [jin.minji@joongang.co.kr]