Real Home Loan Borrowers with Frozen Bank Loans Shift Massively to Secondary Financial Institutions... Life Insurance Companies Hit 'Record High'

Life Insurers Achieve Record 2 Trillion KRW Net Increase by May... "Can Borrow More Than Banks"
P2P Lending with Up to 85% LTV Sees 7.5% Rise in July Mortgage Loans, 45% Increase Since Last Year-End

[Image source=Yonhap News]

[Asia Economy Reporters Oh Hyung-gil and Kim Min-young] As the government tightens regulations on banks' mortgage loans, loan demand is shifting to the secondary financial sector, which is subject to relatively lighter regulations.

Real demand borrowers who are blocked from bank loans are flocking comprehensively to insurance companies, savings banks, and peer-to-peer (P2P) finance companies, causing a surge in mortgage loans. Amid the worsening economic conditions of borrowers due to the novel coronavirus disease (COVID-19), concerns are rising over the deterioration of household debt quality and side effects such as increasing delinquency rates.

According to the Life Insurance Association on the 24th, the scale of mortgage loans by 24 domestic life insurance companies increased by KRW 1.9126 trillion (4.4%) from KRW 43.2629 trillion at the beginning of this year to KRW 45.1755 trillion as of the end of May. This is a 40-fold surge compared to the 0.1% increase in the same period last year. Life insurers' mortgage loans have been steadily increasing. They rose from KRW 29 trillion in 2015 to KRW 35 trillion in 2016, KRW 38 trillion in 2017, and exceeded KRW 40 trillion for the first time in 2018.

In particular, this year, as the government announced consecutive measures to strengthen banks' mortgage loans, loan demand through insurance companies is analyzed to have increased further.

In fact, other loans by life insurers remain relatively sluggish. During the same period, credit loans increased by only KRW 170 billion (0.5%) compared to the beginning of the year, while policy loans actually shrank by about KRW 920 billion (2.5%).

"It is still too early to view the shift of loan demand from banks to insurance companies as a balloon effect"

However, non-life insurance companies, especially small and medium-sized ones, have collectively reduced their mortgage loan businesses to cut costs, resulting in a slight decrease in outstanding balances. During the same period, non-life insurers' mortgage loans stood at KRW 26.4913 trillion, down KRW 36.15 billion from KRW 26.8528 trillion at the beginning of the year.

The significant increase in life insurers' mortgage loans is because they can lend relatively more money compared to banks. According to the government's December 16 real estate measures announced last year, banks apply a strict total debt service ratio (DSR) limit of 40% without exception on mortgage loans for houses exceeding KRW 900 million in speculative areas and speculative overheating districts.

On the other hand, the DSR for secondary financial sectors, including insurance companies, is 60%. This means they have more leeway in lending than banks. However, this will be gradually lowered to 50% next year and 40% by 2022. The average interest rate on bank mortgage loans (2.60% per annum) is not significantly different, which is also considered a factor.

The industry does not expect the trend of increasing mortgage loans to continue for a long time. A life insurance company official said, "Considering the loan scale, it is still premature to say that a balloon effect is occurring with loan demand shifting from banks to insurance companies," adding, "We understand that the demand for loans from existing customers is increasing as loan interest rates have fallen due to the base rate decline."

Real estate secured loans by P2P finance companies, which are on the verge of entering the regulated market, are also rapidly increasing. According to the P2P Finance Association, the cumulative amount of personal real estate secured loans by 44 member companies reached KRW 1.2571 trillion at the end of last month. This is a 7.5% increase from the previous month (KRW 1.1686 trillion) and a 45.7% increase compared to KRW 862.4 billion at the end of last year.

Some P2P companies are attracting customers by offering a maximum loan-to-value ratio (LTV) of 85%, and some are reportedly offering loans up to KRW 1 billion. Loans by non-member companies are not even tracked. When the Online Investment-Linked Finance Act (P2P Finance Act) is enforced on the 27th, the LTV will be limited to within 70%, but this is still higher than banks.

This content was produced with the assistance of AI translation services.