Benefits from toughened loan regulations limited for insurers

ATMs operated by commercial banks / Korea Times file

By Lee Kyung-min

Insurers are not likely to see a major benefit from a tightened lending rule defined by the implementation of the debt-service ratio (DSR), since they offer higher borrowing rates than commercial lenders.

The new rule, set to take effect Thursday, stipulates a 60 percent cap on the DSR for insurers that have long been known to charge higher rates for low-credit borrowers, whereas the cap is 40 percent for commercial lenders that have a customer base with higher credit and stronger ability to pay back.

This new rule came despite expectations that the difference of 20 percentage points in the amount borrowable would result in a “ballooning effect,” as characterized by people being pushed to choose insurers after having the total amount of loans reduced due to the 40 percent cap.

Yet it remains unknown whether insurers will see a greater-than-expected interest income, as the possibility remains for young people ― with relatively low credit and limited collaterals to put up ― to seek loans due to a persistent home buying-craze.

The Financial Services Commission (FSC) plans to put in place the tighter rule, to be measured by a borrower's annual income divided by the principal and interest on all household loans including mortgage, credit loans, card loans and stock loans. It is more stringent than the debt-to-income (DTI) ratio which factors in only interest payments on loans, with mortgage principal being the only principal considered.

Data from the Korea Life Insurance Association showed that mortgage rates offered by life insurers averaged between 2.97 percent and 3.7 percent as of June 21. This figure is up from rates of between 2.78 percent and 3.63 percent in January. Rates offered by non-life insurers are between 3 percent and 3.51 percent as of June.

These rates are higher than those offered by commercial lenders.

Data from the Korea Federation of Banks showed the mortgage rates offered by the country's top five commercial lenders ― Shinhan, KB Kookmin, Woori, Hana and NH NongHyup ― averaged between 2.69 percent and 3.02 percent in June.

Rising borrowing rates should in theory help curb the overheating of the housing market, where most of the cheap liquidity has found its way in amid record-low borrowing rates put in place to fight the COVID-19 pandemic.

But young people whose need for housing is not for speculation but to have a place to live will bear the brunt of higher borrowing costs, as housing prices are soaring faster and showing no signs of stabilizing, despite ― and precisely due to ― two dozen failed real estate policies over the past four years.

“Benchmark market rates are on the rise, pushing up the mortgage rates. Insurers could see the borrowing demands slow to a degree,” an industry watcher said.