Households may borrow more for home purchases
By Chung Ah-young
The government announced Thursday that it will ease the rules on household loans to boost the sagging property market and improve the quality of household debts as part of its economic stimulus package.
Finance Minister Choi Kyung-hwan has stressed the "normalization" of household debts by loosening the regulations on loan-to-value (LTV) and debt-to-income (DTI) ratios that control the amount of loans for home buyers based on their income and ability to pay back debts.
Under the plan, the government will hike the currently differentiated LTV and DTI ratios to a uniform ratio of 70 percent and 60 percent respectively.
It means that borrowers can take out loans worth up to 70 percent of the value of their property and those who earn less income can borrow more money.
Currently, mortgage lending is capped with 50-60 percent LTV and DTI ratio limits depending on the regions ― the tightest regulations are in Seoul with 50 percent for both LTV and DTI ratios.
"The rules are outdated. They were introduced when the property market was booming. But it's different now. We need different rules," Choi said.
The government's move is designed to reinvigorate the housing market by helping more people easily borrow money for home purchases.
Experts agree to the government's attempt to boost the economy, but most remain doubtful about how effective it will be.
The government said that it will help home buyers borrow more money from financial institutions. Also, the newly adjusted LTV and DTI ratios will help people borrow money with the lower interest rates.
Under the current rules, borrowers should pay higher interest rates when they take out a loan from the secondary lenders if they exceed the ratio limits.
Kim Chul-ju, director of the economic policy of the Ministry of Strategy and Finance, said that non-homeowners who have the financial capacities can purchase a house and they can receive mortgage loans from the commercial banks with the lower interest rates from the non-banking institutions which have taken large parts of mortgage loans.
The policy is expected to boost household lending from the banking sector, especially toward the lower-income segment and self-employed individuals who have had limited access to bank loans due to the current low DTI limit.
However, some are raising questions that it might aggravate the household debts, which are already mounting to 1,000 trillion won.
Bahk Jae-wan, former finance minister, said that he agrees with the new economic team's drive to boost the economy but easing the rules on LTV and DTI ratio limits should be more careful.
"It is necessary to simplify the ratios which have been differentiated according to the regions and the financial institutions but the overall easing policy should be more careful," he said in an economic forum of the Federation of Korean Industries.
Concerning the government's plan, Fitch Ratings, a global rating agency, pointed out that it will worsen the household debt.
It said that from an asset-quality perspective, this should have a limited impact on the banking sector, at least in the short term.
"Many households are utilizing non-bank financial institutions and unsecured personal loans to increase their real estate leverage, so enabling greater bank lending to these groups could mean that they are able to transition higher-interest-rate consumer borrowing to longer-term home mortgage borrowing from a bank. As a result, this could translate into improving household debt-servicing capabilities," it said.
However, over the longer term, easing regulations could further strain household debt, Fitch said.
"Korea's household debt/disposable income ratio already exceeds 160 percent, far in excess of other advanced economies. Economic growth is forecast to remain subdued relative to its long-term average, so this suggests that the potential for Korea to significantly expand its household credit without raising risks to asset quality is limited," it said.
By Chung Ah-young
The government announced Thursday that it will ease the rules on household loans to boost the sagging property market and improve the quality of household debts as part of its economic stimulus package.
Finance Minister Choi Kyung-hwan has stressed the "normalization" of household debts by loosening the regulations on loan-to-value (LTV) and debt-to-income (DTI) ratios that control the amount of loans for home buyers based on their income and ability to pay back debts.
Under the plan, the government will hike the currently differentiated LTV and DTI ratios to a uniform ratio of 70 percent and 60 percent respectively.
It means that borrowers can take out loans worth up to 70 percent of the value of their property and those who earn less income can borrow more money.
Currently, mortgage lending is capped with 50-60 percent LTV and DTI ratio limits depending on the regions ― the tightest regulations are in Seoul with 50 percent for both LTV and DTI ratios.
"The rules are outdated. They were introduced when the property market was booming. But it's different now. We need different rules," Choi said.
The government's move is designed to reinvigorate the housing market by helping more people easily borrow money for home purchases.
Experts agree to the government's attempt to boost the economy, but most remain doubtful about how effective it will be.
The government said that it will help home buyers borrow more money from financial institutions. Also, the newly adjusted LTV and DTI ratios will help people borrow money with the lower interest rates.
Under the current rules, borrowers should pay higher interest rates when they take out a loan from the secondary lenders if they exceed the ratio limits.
Kim Chul-ju, director of the economic policy of the Ministry of Strategy and Finance, said that non-homeowners who have the financial capacities can purchase a house and they can receive mortgage loans from the commercial banks with the lower interest rates from the non-banking institutions which have taken large parts of mortgage loans.
The policy is expected to boost household lending from the banking sector, especially toward the lower-income segment and self-employed individuals who have had limited access to bank loans due to the current low DTI limit.
However, some are raising questions that it might aggravate the household debts, which are already mounting to 1,000 trillion won.
Bahk Jae-wan, former finance minister, said that he agrees with the new economic team's drive to boost the economy but easing the rules on LTV and DTI ratio limits should be more careful.
"It is necessary to simplify the ratios which have been differentiated according to the regions and the financial institutions but the overall easing policy should be more careful," he said in an economic forum of the Federation of Korean Industries.
Concerning the government's plan, Fitch Ratings, a global rating agency, pointed out that it will worsen the household debt.
It said that from an asset-quality perspective, this should have a limited impact on the banking sector, at least in the short term.
"Many households are utilizing non-bank financial institutions and unsecured personal loans to increase their real estate leverage, so enabling greater bank lending to these groups could mean that they are able to transition higher-interest-rate consumer borrowing to longer-term home mortgage borrowing from a bank. As a result, this could translate into improving household debt-servicing capabilities," it said.
However, over the longer term, easing regulations could further strain household debt, Fitch said.
"Korea's household debt/disposable income ratio already exceeds 160 percent, far in excess of other advanced economies. Economic growth is forecast to remain subdued relative to its long-term average, so this suggests that the potential for Korea to significantly expand its household credit without raising risks to asset quality is limited," it said.
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