"Blind Support for Vulnerable Borrowers Ineffective... Need to Change Criteria and Provide Selective Benefits"

Young Adults with Mortgage Loans Emerging as New Vulnerable Borrowers
Difficult to Assess Repayment Ability Based on Age and Income Alone
"Need for Specific Criteria to Provide Selective Support"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] An analysis has emerged that the current support measures for vulnerable borrowers, such as additional loan supply and repayment deferrals, have their limitations. As vulnerable borrowers diversify and increase, it is argued that the selection criteria should be more precisely adjusted and support should shift from quantitative to qualitative.

On the 31st, the Korea Institute of Finance published a report titled "A Brief Study on the Policy System for Managing Vulnerable Borrowers' Defaults during Interest Rate Hikes," containing these findings. With the recent rapid rise in the base interest rate, household loan vulnerabilities, which had been limited to low-credit and low-income groups, are spreading to some mortgage loan holders and young people, indicating that policies need to change accordingly.

According to the report, diversification of vulnerable borrowers due to rising interest rates has already progressed. The report defines vulnerable borrowers as those with a Debt Service Ratio (DSR) of 40% or higher and analyzed the trend of their proportion. The survey found that as of June this year, the proportion of vulnerable borrowers was about 18.0% of all borrowers. Assuming that the average loan interest rate rises by 1 percentage point across all products as the base rate is fully passed on to variable-rate loans over time, the proportion of vulnerable borrowers is estimated to increase to 20.2%, a rise of 2.1 percentage points.

However, among mortgage loan holders, the increase in vulnerable borrowers was analyzed to be 4.6 percentage points, four times higher than the 1.2 percentage points for non-holders. Even among mortgage loan holders, differences appeared by age group. It is projected that vulnerable borrowers in their 20s will increase from 27.0% to 33.1%, a rise of 6.1 percentage points, significantly exceeding the increases for those in their 40s (5.2 percentage points) and 50s (3.8 percentage points).

The report emphasizes that since mortgage loan holders and young people are considered new vulnerable groups, policies different from those before are necessary. Until now, temporary interest rate reductions and repayment deferrals have mainly focused on preventing defaults among vulnerable groups. Given the prolonged rise in interest rates, emphasis should also be placed on post-default resolution and borrower recovery functions. Tae-rok Oh, a research fellow at the Korea Institute of Finance, pointed out, "Even among low-credit and low-income groups, rather than unconditional financial support, a system is needed where borrowers who have the ability to repay continue to receive financial support, while those who do not are linked to credit recovery support or welfare programs."

He argues that a more precise approach is necessary for mortgage loan holders. To assess their repayment ability, it is essential to consider not only debt and income but also asset value comprehensively. However, asset value is not directly reflected in the DSR and can fluctuate sensitively with interest rates, causing repayment ability to change rapidly.

Research fellow Oh stated, "If quantitative support continues, when repayment deferral measures end in the future, the demand for debt restructuring will increase due to expanded defaults, and social costs will rise. It is important to move away from a supplier-centered system that selects support targets based only on outward criteria such as income and age, and instead establish a system that evaluates actual repayment ability based on detailed borrower information and circumstances, representing a qualitative improvement."

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