S.Korea sets new fixed-rate, amortising home loan rules for banks

SEOUL Thu Feb 27, 2014 12:00am EST

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SEOUL Feb 27 (Reuters) - South Korea's financial regulator said on Thursday fixed-rate and amortising home loans must each account for 40 percent of banks' residential mortgage holdings by 2017 - the latest attempt to push households towards structurally sound loans.

The Financial Services Commission (FSC), said in a statement the proportion of fixed-rate and amortising loans must each be 20 percent of banks' overall mortgages at end-2014 and 25 percent at end-2015, revised upwards from previous mandates. The target for 2016 will remain at 30 percent for both types of loans.

The new targets seek to push borrowers towards more manageable and predictable repayment schedules. While exact data is not available, banking industry and government officials say a significant proportion of borrowers are on variable rate loans or only paying interest, exposing them to risk of default if, for example, the U.S. Federal Reserve's stimulus tapering leads to tighter credit conditions and higher interest rates globally.

Fixed-rate loans would offer protection against future interest rate increases, while amortising loans would get borrowers to pay down their principal over time.

The FSC says South Korea's household debt to disposable income ratio stood at 163.8 percent in 2012, significantly higher than the Organisation for Economic Co-operation and Development average of 134.8 percent and posing a significant burden on household spending. The government wants to reduce this ratio by five percentage points by 2017.

"Household debt is a long-standing structural issue and difficult to solve in the short term," the regulator said in a statement.

"While managing household debt at an appropriate level to ensure it doesn't pose a burden to our economy, we will aim to gradually reduce related risks to ensure that the household debt restructuring process won't have negative effects on private consumption or the property market."

The government will also expand support for structurally sound mortgages through the state-run Korea Housing Finance Corp and instruct second-tier lenders to increase the proportion of long-term, amortising loans to households. Borrowers taking on such loans will also be offered tax incentives.

(Reporting by Se Young Lee; Editing by Eric Meijer)

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