[Financial Report] Bank of Korea Warns Youth on 'Excessive Mortgage Loans'... "DSR Application Scope Should Be Expanded"

Bank of Korea Releases Financial Stability Report
Youth Vulnerable Borrowers Increase with Rising Mortgage Loans
Elderly See Sharp Rise in Personal Business Loans
Bank of Korea: "Expand DSR Application and Strengthen Screening"

As the real estate market recovers recently, it has been found that home purchases using mortgage loans are increasing again, especially among the youth. Although the delinquency rate among the youth is not yet high compared to other age groups, the number of potentially vulnerable borrowers is rapidly increasing, prompting analysis that debt management needs to be further strengthened.

On the 26th, the Bank of Korea explained in its Financial Stability Report that household loans, which increased after COVID-19, show differentiated characteristics by age group. Among those aged 30 and under, debt has rapidly increased mainly through housing-related household loans, while middle-aged groups in their 40s and 50s and seniors aged 60 and above have expanded funding mainly through loans for self-employed individuals.

For the youth, it is analyzed that they have recently increased purchases of owner-occupied homes using mortgage loans, supported by the expansion of jeonse deposit loans and the supply of special BoGeumJaRi loans. Since the initial principal repayment burden can be lowered through graduated repayment or extended maturities, there is a strong trend of increasing loans among the youth.

Although the delinquency rate among the youth is still low, it is rising among vulnerable borrowers, and the number of potentially vulnerable borrowers is also increasing.

The Bank of Korea stated, "Among the youth, debt repayment ability is continuously deteriorating in terms of assets, and delinquency rates are rising recently, especially among vulnerable borrowers. The proportion of potentially vulnerable borrowers is also showing an increasing trend."

According to the Bank of Korea, the debt-to-asset ratio, which indicates debt repayment ability, worsened significantly for the youth from 31.6% in 2017 to 39% last year. In contrast, during the same period, the ratio improved from 25.4% to 23.0% for middle-aged groups and from 15.4% to 12.5% for seniors.

Among those in their 40s, the average household loan amount per person was the highest at 110 million KRW, and recently, housing-related loans have increased as home purchases, especially of high-priced homes, have risen, similar to the youth.

On the other hand, among seniors, loans for self-employed individuals in the non-bank sector are on the rise.

The Bank of Korea explained, "Seniors have high demand for purchasing commercial real estate for retirement preparation, self-employment, or asset investment activities. Due to the expansion of benefits for housing rental business operators and strengthened household loan regulations, loans for self-employed individuals in the non-bank sector are increasing. In particular, after the phased implementation of borrower-level total debt service ratio (DSR) regulations from 2021 to 2022, high DSR borrowers have a stronger incentive to raise funds through self-employed loans."

In fact, from the second quarter of 2021 to the second quarter of this year, borrowers with a DSR exceeding 70% reduced household loans by 15.6% but significantly increased self-employed loans by 33.9%.

The Bank of Korea emphasized that as household loan default risks increase due to home purchases by the youth, debt management must be strengthened going forward.

To this end, it explained the need to gradually expand the scope of loans subject to DSR application and strengthen the assessment of borrowers' repayment ability, especially for long-term mortgage loans.

It also pointed out that in the mid-to-long term, the reliance on household loans in the housing market should be reduced, the proportion of installment repayment loans expanded, and some principal repayments encouraged even for existing loans with lump-sum repayment methods.

Regarding seniors with many self-employed loans, the Bank of Korea advised that non-bank credit risk management systems be improved, credit screening for self-employed loans strengthened, and support measures such as expanding seniors' income bases be implemented simultaneously.

The Bank of Korea stated, "For seniors, it is worth considering measures such as expanding reverse mortgages to increase retirement funding capacity and establishing regulatory frameworks for self-employed loans. There is also a need to activate discussions on fundamental socio-economic measures such as pension systems to secure seniors' income."

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