[Geuman Report] Household Loans for Home Purchase Increase... Delinquency Rate Expected to Continue Rising Mainly Among Vulnerable Borrowers

Bank of Korea H2 Financial Stability Report
Proportion of Living Expenses Loans Reduced
Interest Burden Ratio for Vulnerable Borrowers Twice That of Less Vulnerable Borrowers

Since April of this year, household loans for home purchases have increased during the recovery of the real estate market. Due to the recent rise in loan interest rates, the delinquency rate is expected to increase temporarily, especially among vulnerable borrowers.

According to the Financial Stability Report released by the Bank of Korea on the 28th, the increase in household loans from the second quarter of this year was mainly due to the demand for funds for home purchases. By purpose of funds, the proportion for home purchases increased from 41.3% in January to March to 46.9% in April to October, while the proportion for living expenses decreased from 26.7% to 21.3% during the same period.

As a result, the risk of insolvency in vulnerable household sectors is accumulating. According to the Bank of Korea, the interest burden ratio (annual interest payments/annual income) of vulnerable borrowers is about twice as high as that of non-vulnerable borrowers. The report states that as of the second quarter of this year, the interest burden ratio for vulnerable borrowers was 20.7%, while it was 11.8% for non-vulnerable borrowers.

The Bank of Korea explained, "With interest rates still high, if the domestic demand recovery weakens more than expected, the debt repayment burden of existing borrowers will increase, which could negatively affect the credit risk of vulnerable household loans."

The delinquency rate is expected to continue rising temporarily, centered on vulnerable borrowers. According to the Bank of Korea’s analysis, the current household interest burden ratio shows a high correlation with the household loan delinquency rate one year (four quarters) later. However, since the proportion of vulnerable borrowers was not large at 5.2% of loan balances as of the end of the third quarter this year, the Bank of Korea believes that financial institutions will be able to manage the rise in delinquency rates.

Since the second half of last year, with the increase in the LTV (Loan-to-Value) regulatory ceiling, the average LTV ratio of mortgage loans, which account for a large portion of household loans, has slightly risen, mainly in banks. As of the end of the third quarter of this year, the average LTV ratio of household mortgage loans at banks and non-bank financial institutions (based on mutual finance) was 44.8% and 56.8%, respectively, up from 42.4% and 56.6% at the end of the first quarter.

Trends in Household Loan Delinquency Rates by Borrower Characteristics and Industry Sector. / Source: Bank of Korea

The Bank of Korea stated, "Considering that the scale of household loan growth is not large compared to the past, the delinquency rate is lower than the long-term average, and the mortgage loan LTV ratio remains favorable, the recent increase in household debt is unlikely to undermine the stability of the financial system." However, it also suggested, "Excessive household debt can reduce consumption capacity, hindering growth and increasing the vulnerability of the financial system. Therefore, it is necessary to manage the increase in household loans at an appropriate level through the establishment of DSR (Debt Service Ratio) regulations and other measures."

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