SEOUL, Dec. 14 (Korea Bizwire) — An interest rate rise in South Korea will increase the debt repayment burdens of vulnerable households who over-extended themselves on mortgages during the low rate period, the central bank said Thursday.
“In general, household and corporate borrowers will be able to afford an increase in debt repayment incurred by a 1 percent point rise in loan rates, if they have solid income and financial assets,” the Bank of Korea (BOK) said in a report submitted to the parliament. “But those who took out excessive debts compared to their income and signed floating-rate loans will suffer from increased interest costs.”
It said South Korea’s total household credit reached 1,419.1 trillion won (US$1.3 trillion) as of the end of September, more than doubling from 665 trillion won at the end of 2007.
At the same time, the household debt-to-disposable income ratio came to 155.5 percent, up 2.1 percentage points from the end of 2016.
Last month, the central bank raised the base interest rate by a quarter percentage point to 1.5 percent from a record low of 1.25 percent as part of its efforts to slow down fast-expanding family loans.
The decision reflected the end of the BOK’s monetary easing stance, which had lasted nearly six and half years, while the U.S. Federal Reserve has raised its rates three times through December this year.
“The increased interest costs will likely be offset to some extent by a possible economic recovery that will help households and businesses improve their income,” said the central bank.
South Korea’s household debt is mainly caused by people taking advantage of eased regulations and low interest rates to borrow large sums of money from banks and other financial firms to buy homes and invest in real estate and businesses.
As a way of curbing real estate speculation in the country, the South Korean government announced a set of measures to tighten lending rules on homes.
It adopted stricter rules requiring multiple-home owners to pay higher capital gains tax when they sell their houses. Also, the government has toughened the loan-to-value (LTV) and debt-to-income (DTI) ratios, which limit homebuyers ability to get home-backed loans through their property value and income.
Meanwhile, the BOK said the South Korean financial system’s resilience — its capacity to withstand domestic and external shocks — has remained solid.
It said capital adequacy ratios at both banks and nonbanking financial institutions have greatly exceeded the regulatory levels.
“From the standpoint of the external payment capacity, net external assets and foreign exchange reserves, numbers are continuing to improve, and the short-term external debt ratio has also remained low,” the report said.
In a stress test, the BOK said the local banking industry is in a favorable condition against possible monetary normalization by the U.S. Fed and a drop in housing prices.