Korea Household Debt Hits Record as Repayment Burden Set to Rise

  • Debt rises 11% from previous year to 1,295.8 trillion won
  • Government to strengthen banks’ lending requirements

South Korea’s household debt swelled to a record in the third quarter, prompting the government to release another set of measures to slow its rise.

Household debt including credit purchases rose to 1,295.8 trillion won ($1.1 trillion) as of end-September, an 11 percent jump from the previous year, a Bank of Korea statement showed on Thursday. The financial regulator said Thursday that it will seek stricter loan screening by banks on some type of mortgages and lending from so-called mutual finance institutions that had been loosely scrutinized, adding to measures announced in August.

The rise in debt comes as Donald Trump’s election and expectations that the Federal Reserve will increase interest rates next month push global yields higher, driving domestic rates higher and adding to some South Korean debtors’ repayment burden. As of end-June, about 60 percent of mortgages were floating-rate loans.  

South Korean policy makers have said the level of private debt does not threaten financial stability because delinquency ratios are low, although they remain on alert for risks. The delinquency ratio for bank loans was 0.36 percent as of end-March, and that for non-bank financial institution loans at 2.1 percent, BOK data show.

The debt has reached a level that hurts consumption, according to Hyundai Research Institute. Limited gains in household income, combined with a rising debt-repayment burden, could cut consumption growth by 0.6 percentage point next year, according to the institute. 

The Financial Services Commission said that from next year, banks will be required to apply stricter rules on collective loans by buyers of new apartments. For these loans, banks should assess the ability of home buyers to repay the principal of all debt, not just interest payments, and suggest amortized loans. Similar rules to be applied to mortgages from mutual finance institutions, which includes National Federation of Fisheries Cooperative.

The rules of checking debtors’ income and offering amortized loans were previously only applied to banks and insurers. Collective loans from new apartment buyers had also been excluded.

Earlier this month, the government announced measures such as limiting the resale of rights to buy new apartments in an effort to prevent overheating in some areas.

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