The FSC announced its policy direction for household debt management and a guideline to encourage banks to strengthen their mortgage application screening so that borrowers take out loans within their repayment ability and repay in installments from the beginning.
HOUSEHOLD DEBT GROWTH & POLICY DIRECTION
Korea’s household debt grows fast to amount to KRW 1,166 trillion at the end of September 2015. The rapid growth is attributable to a combination of several factors such as growing demand for loans amid low interest rates, eased restriction on lending for home buyers and housing market recovery.
The increase is mainly from mortgage lending by banks, which is at lower interest rates and maintains soundness. In particular, group lending for apartment buyers has largely increased as markets for new apartments for sale and reconstruction recover.
Since the government-backed program to improve mortgage debt structure was launched in March this year, shares of amortized and fixed-rate mortgages rose to 37.5% and 33.6% respectively out of the total mortgage lending by banks at the end of September 2015, compared to 6.4% and 0.5% at the end of 2010.
As household debt grows faster than household income, the government is taking comprehensive measures to 1) increase household income to boost borrowers’ repayment ability, 2) improve household debt structure; and 3) support low-income households. It is all the more important to improve structural soundness of household debt in response to potential risks such as the U.S. interest rate hikes.
Household debt management policy also requires a balanced approach which takes into account various factors such as private consumption, housing market conditions and regulatory effects on the real economy. Therefore, the government is working towards minimizing potential risks in household debt, consistently upholding the principle that household debt should be borrowed within the borrower’s repayment ability and paid back in installments from the beginning.
「GUIDELINE ON BANKS’ MORTGAGE LOAN SCREENING」 BY KFB
The guideline is intended to encourage banks to establish a reinforced screening system that can more accurately assess and preemptively manage borrowers’ credit risk.
► KEY POINTS
1. Use of more objective income references
Banks will use more objective references to figure out a borrower’s income in order to more accurately assess the borrower’s repayment ability.
2. More handlings of fully-amortized loans
Banks will recommend fully-amortized loans to borrowers seeking to take out large amount loans so that borrowers can repay their principal and interests from the beginning, which will prevent borrowers from facing excessive repayment burden at maturity.
3. Application of ‘stress rate’
When newly lending floating-rate mortgages, banks will apply ‘stress rate ’ in calculating the amount of loans that borrowers can afford in case of interest rate hikes in the future. If DTI exceeds 80% given the stress rate, banks will recommend fixed-rate loans or reduce the loan amount to lower DTI below 80%.
4. Introduction of Debt Service Ratio(DSR)
DSR will be introduced to comprehensively assess a borrower’s debt servicing burden not only for a mortgage but also for other debts. If a borrower’s DSR exceeds a certain level set by banks, the borrower will be under more stringent monitoring by banks to prevent default risk.
► EXCEPTIONS FOR IMPLEMENTATION
There are a few exceptions for implementing of the guideline to ensure the tighter standards should not excessively restrict household lending.
1. Group lending for apartment buyers will be exempted from the application of the guideline. It is difficult to uniformly apply the same standards as applied to general mortgages, given their different lending structure and the impact on pre-sale market for apartments.
2. The guideline will only be applied to newly extended mortgages after the guideline takes effect.
3. Among newly extended mortgages, exceptions will be permitted for small loans less than KRW 30 million or for loans for necessary expenses for a living such as medical or education expenses.
► IMPLEMENTATION SCHEDULE
The guideline will take into force from February 1, 2016 in Seoul and its metropolitan area, while it will be implemented from May 2, 2016 in provincial areas.
* Please refer to the attached PDF for details.