Household Debt Not Yet at Threat Level... Policy Mortgage Supply Speed Adjustment

Financial Services Commission Holds 'Household Debt Status Review Meeting' with Related Agencies
"Household Debt Not at a Level Threatening Financial Stability... Long-term Response"

Financial authorities have decided to focus on inspecting the lending attitudes of banks and other financial institutions and to adjust the pace of policy mortgage supply if necessary. This response comes as household loans by banks increased by about 6 trillion won in July alone, the largest increase in 1 year and 10 months, pushing household debt to a record high.

On the 10th, Lee Se-hoon, Secretary General of the Financial Services Commission, stated at the 'Household Debt Status Review Meeting' held together with related agencies including the Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, Bank of Korea, Financial Supervisory Service, Korea Housing Finance Corporation, Korea Federation of Banks, and Korea Institute of Finance, "Although the current pace of household debt increase cannot yet be seen as threatening financial stability, once the increase in household debt accelerates, it will be difficult to tighten it to an appropriate level. Therefore, we must take a long-term perspective and proactively respond to household debt risks."

According to the Bank of Korea, as of the end of July, the outstanding household loans in the banking sector amounted to 1,068.1 trillion won, an increase of 6 trillion won compared to the previous month. This increase is the largest in 1 year and 10 months since September 2021 (6.4 trillion won), and the outstanding balance itself is the largest ever recorded. Household loans in the banking sector have been increasing monthly since April, shifting to net growth.

At the meeting, participants agreed regarding the trend of household loan expansion since April that "due to the US interest rate hikes and the decline in the housing market, household debt, which had been decreasing, is somewhat increasing as the housing market normalizes," and "although the current expansion of household debt is not at a level that immediately affects financial stability, if the increase expands and continues, it could negatively impact the macroeconomy and financial stability, so proactive management is necessary."

First, the authorities decided to consider measures to adjust the supply speed of policy mortgages. The Special Bogeumjari Loan, launched earlier this year, has supplied a total of 31 trillion won by July, rapidly depleting the initial target of 39.6 trillion won over one year. Since the Special Bogeumjari Loan interest rate rose by 25 basis points (1bp=0.01%) this month, the authorities plan to prepare measures to adjust the supply pace, including possible further increases, considering the supply trend and mortgage-backed securities (MBS) funding conditions.

Additionally, the authorities will inspect whether the lending attitudes of financial institutions have become lax. To this end, they will examine whether recently introduced 50-year maturity mortgage loans by several banks are being used as a means to circumvent the Debt Service Ratio (DSR) regulations and, if necessary, pursue institutional improvements. Furthermore, as internet-only banks expand mortgage loans through non-face-to-face channels, they will closely scrutinize whether borrowers’ income assessments are conducted thoroughly and whether risks related to excessive lending and defaults are adequately managed.

Policy tasks aimed at structurally improving household debt will also be actively identified and promoted. While steadily implementing already prepared measures to expand fixed-rate loans, such as introducing a new fixed-rate target ratio and revitalizing covered bonds, additional institutional improvement tasks will be identified and reviewed to ensure the establishment of the DSR system and the expansion of installment repayment ratios. Moreover, improvement tasks related to verifying repayment ability and supporting debt adjustment will be considered to prevent youth and vulnerable groups from suffering due to loan defaults.

Secretary General Lee said, "We will continue policy efforts for quantitative and qualitative management so that household debt does not threaten financial stability or act as a factor hindering the structural growth of our economy."

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