Mortgage frenzy leads banks to tighten loans ahead of rate cut

Banks are tightening their rules for issuing mortgages as loans surge ahead of anticipated rate cuts and stricter regulations this month.

Apartments in central Seoul are seen from Mount Namsan in central Seoul in March 2023. [NEWS1]

Banks are significantly tightening loan issuance amid a record surge in household loans, driven by anticipation of impending rate cuts and the implementation of heightened regulations starting this month.

Woori Bank, one of the five major commercial banks in Korea, announced on Sunday that it would suspend loans for the purpose of purchasing additional residential properties in Seoul and the surrounding regions for all homeowners starting Sept. 9.

The bank will continue to issue loans for housing transactions only to non-homeowners, or on the condition of selling existing properties in cases of discrepancies between the dates for moving in and out.

Woori Bank headquarters building in Jung District, central Seoul [WOORI FINANCIAL GROUP]

Loans for jeonse transactions, or large lump-sum deposits, will only be granted when all members of a household do not own property in order to keep gap investment demand under control. The so-called gap investment occurs when a buyer purchases a house while simultaneously offering the house for jeonse, effectively using the deposit as an interest-free loan.

The maximum duration for mortgage loans will be reduced from the current 40 years to 30 years as well. Reducing the maximum duration pushes up the annual repayment amount under the stressed debt service ratio (DSR) rules, resulting in lower loan limits.

“As the recent growth in household loans continues to persist, we decided to implement measures to regulate loans in order to prevent an increase in speculative demand,” said a spokesperson for Woori Bank.

“Regardless, we will continue to grant loans to non-homeowners and buyers who intend to live in the property [instead of making transactions for an investment purpose] with the goal of enhancing the overall effectiveness of household loan management as a whole,” the spokesperson added.

Kakao Bank, an internet-only bank, said Monday that it will grant mortgages for housing transactions only to non-homeowners starting Tuesday. The maximum duration for expiration would be reduced from the current 50 years to 30 years as well.

The five major banks in Korea — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — have upped interest rates for mortgage loans 22 times in total from July to August, grappling with soaring demand for household loans.

However, as the rising of mortgage rates bucks the wider trend of declining market interest rates ahead of upcoming rate cuts, the banks faced criticism from the financial authorities over market distortion.

Financial Supervisory Service Gov. Lee Bok-hyun warned the banks against additional rate hikes, saying, "The latest increase in borrowing costs by banks is not what we wanted," during a television appearance on Aug. 25.

"We have made minimal interference for the sake of banks' autonomy, but we feel the need to intervene more strongly considering the real estate market situation in the future,” Lee added.

As such, the banks began to roll out stringent measures to cap the soaring demand without further upping rates, such as reducing loan durations and suspending loans for jeonse transactions.

In August, household loans and mortgage loans surged at a record pace, due to growing housing prices and a steep increase in demand ahead of the implementation of the second-phase DSR rules, which are designed to reduce loan limits.

The combined outstanding balance of household loans at the five commercial banks grew 9.6 trillion won ($7.2 billion) from a month prior to 725.4 trillion won in August, the steepest increase ever recorded.

Mortgages also grew by 8.9 trillion won to 568.7 trillion won, even outpacing the record 7.6 trillion won surge logged in July.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]