The government has decided to order banks to increase the portion of loans with fixed interest rates to 40 percent and encourage households to amortize their debts in a bid to improve household debt structure.
This is the key part of measures introduced Thursday by the Financial Services Commission (FSC) to rein in surging household debt, which has emerged as a major downside risk for the Korean economy.
The growth of such debt has been accelerating in recent months due mainly to a surge of low-interest government-backed mortgages for first-time homebuyers. This is part of the government's desperate moves to spur housing demand, and thus revitalize the property market.
While telling more people to buy houses through tasking on debt, the government is taking steps to enhance the quality of debt at the same time as more experts sound alarm about its rising levels.
Under the measures, banks will be advised to gradually replace variable-rate mortgages with fixed-rate ones. It aims to increase the portion of fixed-rate loans to 40 percent. That's because borrowers of flexible-rate loans shoulder greater interest burdens if money market rates go up.
Banks will no longer be able to offer a "grace period" for mortgage borrowers, during which they are allowed to pay only interest without paying the principal. Banks have used this method to boost their interest income, while borrowers can buy homes without much financial burden for at least a few years.
To spur the transition toward fixed-rate mortgages without a grace period, the government will increase tax deductions for borrowers of these loans.
It also plans to introduce more loans that have an interest rate ceiling to reduce damage to borrowers from possible interest rate rises.
The Ministry of Strategy and Finance said it has set a goal of lowering the debt-to-disposal income ratio by five percentage points by 2017. As of the end of 2012, the figure stood at 164 percent, which was much higher than the OECD average of 136 percent.
"We will strengthen monitoring of the debt increases to keep them at a manageable level," Finance Minister Hyun Oh-seok said in a press conference, also attended by Financial Services Commission Chairman Shin Je-yoon and other senior officials.
"The bottom line is that the household debt issue should not dampen our efforts to revive the economy. While making efforts to improve the overall quality of debt, we will increase support programs for low-income households and mom-and-pop businesses, which are more vulnerable to risks."
The country's household debt soared to a record high of 1.02 quadrillion won as of January, according to the Bank of Korea.
The ratio of debt held by Korean households to their disposable income has soared from 122 percent in 2004 to 137 percent in 2006, 154 percent in 2009 and 163.8 percent in 2012.
Accordingly, the household debt-to-gross domestic product ratio has also jumped.
The figure stood at 70.5 percent in 2004, but continued to rise to 84.3 percent in 2008, 86.6 percent in 2010 and 91.1 percent in 2012. The OECD average was 76 percent as of 2011.
Some experts said that while household debt has grown at alarming levels in recent years, what is important is the quality of debt.
"Debt is an integral part of growth in an advanced economy. Likewise, debt can make people rich as long as they earn enough income to repay it," said Shin Minyong, an analyst from LG Economic Research Institute. "However, poor people under excessive debt can face problems. They will be exposed to greater risks if the interest rate rises. That's why the government should thoroughly monitor their debt repayment capabilities."