South Korean banks' mortgages could go sour at a fast pace amid soaring inflation and interest rates as the economic downturn is expected to reduce household incomes, according to a think tank Sunday.
"The current upturn in interest rates is expected to continue because of inflation stemming from high commodity prices," the Korea Institute of Finance said in a report. "The default of home-backed loans will likely rise fast if a slowing economy shrinks household incomes down the road."
South Korea's consumer prices soared 5.5 percent in June from a year earlier, the fastest rate in almost a decade. The benchmark yield on five-year government bonds hovers at 6.02 percent.
The think tank said borrowers of mortgages are likely to face an increasing burden of interest and principal payments since about 90 percent of home-backed loans are linked to market interest rates.
As of 2007, South Korean households had financial debts amounting to 1.5 times their disposable incomes, higher than 1.4 times of the United States and 1.2 times of Japan.
However, the think tank predicted that a future rise in mortgage defaults is unlikely to lead to the worsening of bank balance sheets because home-backed loans are sufficiently secured.
As of the end of 2007, the loan-to-value ratio of mortgages, or the percentage of loans to home values, stood at 52.2 percent, it said.