ED Introducing 40-year mortgages

Elaborate safeguards needed to help young adults own homes easily

The financial authorities have unveiled a plan to introduce mortgages with a maturity of 40 years to help young adults more easily buy a home. In a new year business plan announced Tuesday, Financial Services Commission (FSC) Chairman Eun Sung-soo said the loan program will start as a pilot project in the second half of the year for young people, newly-wed couples and first-time home buyers. “This program is meant to help young people own homes with their current income,” Eun said.

Mortgages, a popular tool for purchasing homes in many industrialized countries, enable individuals to own the property free and clear if they repay the loan plus interest over many years, after borrowing money with the house as collateral. Research shows that a person can own a house with a burden similar to monthly rent if they use a mortgage with a maximum term of 40 years. However, elaborate safeguards are essential before introducing the new debt instrument, taking into account a host of expected problems. As seen from the global financial crisis in 2008 sparked by subprime mortgages in the U.S. that became insolvent, mortgages could pose a grave threat to our economy unless managed properly.

Most problematic is that mortgage plans may not suit our residential culture. Ordinary people here usually move to larger houses according to life-cycle stages before downsizing their homes when they become older. Therefore, it might not be easy for them to accept a plan in which they have to pay back the mortgage over 30 to 40 years once they choose a home.

Despite all these problems, however, mortgages with 30- to 40-year maturities are worth trying. What is needed first is for the FSC to flexibly apply rules on the debt to service ratio ― the percentage of an individual's debt service payments (principal plus interest) to income ― to young adults so that they can receive mortgages although their current income is low.