SEOUL Feb 27 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
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
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
"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)