South Korea will further tighten mortgage rules for owners of multiple homes, officials said Tuesday, as part of the latest comprehensive measures to ensure mounting household debt does not hurt the nation's economy.
The fresh set of debt-controlling steps comes at a time when the Bank of Korea (BOK) has consistently hinted that it could shift into a tightening mode in coming months.
Starting next January, loan limits in Seoul and other government-designated areas will include the principal of a borrower's existing homes, the government said in a statement.
Currently, the so-called debt-to-income ratio (DTI) in Seoul and other government-designated areas, which is limited to 40 percent of the annual income of a borrower, includes the principal and interest payment of a new home as well as the interest payment for the borrower's existing homes.
If the principal of existing homes is included in loan limits, it would be almost impossible for owners of multiple homes to take out mortgage loans, officials said.
From the second half of next year, the government will require banks and other financial institutions to adopt a new mortgage restriction, called the debt service ratio (DSR).
The DSR, published by the Bank for International Settlements (BIS), reflects the share of income used to service debt. It's regarded as a reliable early warning indicator for systemic banking crises.
Banks and other financial institutions can accurately figure out the financial status of a borrower if they adopt the DSR, officials said.
Currently, the local financial sector is advised to use the DSR on a voluntary basis.
Finance Minister Kim Dong-yeon told reporters that a "pre-emptive response" is needed to slow down the growth pace of household debt, as the nation's household debt-to-gross domestic product, which stood at more than 90 percent, is higher than other nations
"In particular, difficulties can be experienced by high-risk households and self-employed people if interest rates start to go up," the country's top economic policymaker said.
Amid a record-low interest rate and ample liquidity, the nation's household debt has shown a double-digit growth rate over the past two years.
With the latest measures, Kim said the government is targeting an annual growth rate of about 8 percent for household debt.
Officials said the new measures would curb speculative property investment by owners of multiple homes.
Household debt stood at 1,388.3 trillion won (US$1.23 trillion) at the end of June, up 10.4 percent from a year earlier, according to the BOK.
Although there is little risk that household debt may spark a financial crisis, rising debt chokes off private consumption and makes it difficult for the central bank to raise its key rate amid global monetary tightening.
Last week, the BOK revised up its growth outlook for the nation's economy this year to 3 percent and held its key rate steady for October.
During a press conference following the rate decision, central bank Gov. Lee Ju-yeol said the market conditions are "somewhat ripe" for the central bank to gradually tighten its monetary easing stance, hinting at a possible rate rise in the near future.
Experts gave the fresh measures a mixed response.
Sung Tae-yoon, an economics professor at Yonsei University, expected the latest move to help reduce the total amount of household debt because it would make it impossible for people without sufficient income to buy a new home.
However, Cho Young-moo, a researcher at the LG Economic Research Institute, said the measures are likely to widen the gap in investment opportunity between rich and middle-income households, as loan limits are based on their income.
The government also unveiled a package of support measures for people who are vulnerable to household debt risks.
As part of the support measures, the government will launch a mortgage refinancing program worth 500 billion won in December to help borrowers from the non-banking sector to convert their existing mortgages into fixed-rate and amortizing loans with a longer maturity, according to the statement.
Bank and other financial institutions will be encouraged to strengthen their risk management in their lending to self-employed people to prevent loans from excessively concentrating in certain categories of businesses, it said.