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UPDATE 1-S.Korea restructures home loan rules to ease debt threat
February 27, 2014 / 7:26 AM / in 4 years

UPDATE 1-S.Korea restructures home loan rules to ease debt threat

* Regulator raises fixed-rate, amortising loan requirements for banks

* Measures seek to push safer borrowing structure to borrowers

* Income growth seen the fundamental solution to household debt (Updates with comments from officials, details)

By Se Young Lee

SEOUL, Feb 27 (Reuters) - South Korea announced fresh measures on Thursday to push borrowers towards safer mortgage loans - the latest official steps in restructuring household debt to avert a potential collapse in private consumption.

The Financial Services Commission, the country’s financial regulator, said fixed-rate and amortising home loans must each account for 40 percent of banks’ residential mortgage holdings by 2017.

It also revised up the minimum requirements for the proportion of these loans for 2014 and 2015.

The measures underscore a difficult balancing act for policymakers, who understand the need for further credit growth among households to boost economic growth, but worry about borrowers defaulting in coming years as the U.S. Federal Reserve’s stimulus tapering leads to higher rates and tighter liquidity across the globe.

South Korean households’ debt-to-disposable-income ratio was 163.8 percent at end-2012, well above the Organisation for Economic Co-operation and Development average of 134.8 percent. A significant portion of Korean borrowers are servicing variable rate loans or are only paying off interest, leaving them vulnerable to sudden spikes in repayment terms.

Policymakers are already pushing to increase employment, particularly for women, as greater income is seen as key to meeting its target for reducing households’ relative indebtedness by five percentage points by 2017.

“Our target of reducing households’ debt-to-disposable- income ratio...reflects the government’s firm determination to use the fundamental solution of boosting household income in tandem with the restructuring of their debt to restore households’ financial health,” FSC Chairman Shin Je-yoon told reporters at a briefing.

Fixed-rate loans would offer protection against future interest rate increases and amortising loans would get borrowers to pay down their principal over time and gradually reduce their overall debt. This, regulators hope, will keep debt manageable and predictable enough to free up household spending in coming years as incomes start rising.

“Deleveraging is a painful process, whether it’s for corporates or households,” said LIG Investment economist Kim Yu-kyum. “If you reduce debt outright, it’s hard for the economy to grow, so pushing income levels higher to drive overall debt levels lower is the right way to go from a policy perspective.”

The government will also expand support for structurally sound mortgages through the state-run Korea Housing Finance Corp. The government will also increase the risk weighting of riskier loans when calculating banks’ capital reserve ratios to create an additional incentive to issue the safer loans.

Policymakers will also 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, to encourage them to switch to safer forms of borrowing.

Reporting by Se Young Lee; Editing by Eric Meijer

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