SEOUL, Nov. 19 (Korea Bizwire) – South Korean banks will likely impose tougher rules for screening mortgages in non-capital areas starting next year, joining government-led efforts to rein in the country’s runaway household debt, industry sources said Thursday.
The financial authorities have asked local banks to use the debt-to-income (DTI) ratio when they screen mortgage requests from borrowers in provincial regions, according to the sources.
The DTI ratio is a set of household loan controlling measures, along with the loan-to-value (LTV) ratio, enabling homebuyers to borrow up to 60 percent of their income for mortgage payments.
Local lenders have employed the DTI criteria on mortgages on houses located only in Seoul and its metropolitan area, where their housing prices have basked in a real estate boom throughout history.
Meanwhile, the LTV ratio was set at 70 percent at large, under which borrowers can lend money that’s up to 70 percent of their property value notwithstanding where the home is located.
The move is in response to housing prices in provincial areas soaring in recent months amid strong signs of a recovery in the local real estate market.
According to the latest market data, prices of apartments in Daegu, the country’s fourth-largest city by population, have risen an average 10.5 percent through October, far beating Seoul’s 6 percent growth.
The average apartment prices of five big cities, including Daegu, hit 5.6 percent over the cited period.
The South Korean government has been struggling to tackle fast-rising household debt that could be the biggest threat to Asia’s fourth-largest economy in the face of a possible U.S. rate hike.
Household loans extended by local lenders increased at the fastest clip last month, reaching 624.8 trillion won (US$539.3 billion) as of the end of October, up 9 trillion won from the previous month, which was driven by rounds of rate cuts aimed at boosting the sluggish growth momentum.
The Financial Service Commission, the country’s financial market regulatory body, has come up with a new screening system for home-backed loans in a bid to slow down the growth pace of household debt.
Starting next year, banks will be required to give out loans after assessing a borrower’s debt repayment ability by looking at their annual income rather than only the value of collateral.’