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| Bank of Korea Governor Lee Ju-yeol speaks during an audit of the central bank at the National Assembly, Oct. 15. Yonhap |
Pressure furthered from Bank of Korea’s November rate hike
By Lee Kyung-min
Borrowers in need of loans for “jeonse,” or Korean-style deposit lease payments, remain highly concerned, despite a recent government announcement that mortgage loan seekers will not be subject to tightening lending rules implemented to curb snowballing household debt over the course of the COVID-19 pandemic. Unique to Korea, jeonse is a home-renting system whereby tenants pay a refundable lump sum deposit instead of a monthly rent.
Young, low-income borrowers who took out cheap loans enabled by the pandemic-induced expansionary monetary policies will be squeezed by rising interest payments. But Bank of Korea Governor Lee Ju-yeol expressed little concern about a key rate hike wreaking havoc on the economy.
“Our economic forecast showed that borrowers would experience limited difficulty even when we raise the key rate in November,” Lee said during an audit of the central bank by the National Assembly, Oct. 15.
The annual variable mortgage rates to be offered next week by Korea’s top four lenders ― KB Kookmin, Shinhan, Hana and Woori ― jumped to between 3.03 percent and 4.67 percent. This is up as much as 0.48 percentage points compared to the end of August when it hovered between 2.62 and 4.19 percent.
The fixed rate soared to 3.14 percent and 4.95 percent, up from 2.92 and 4.42 percent during the same period. The highest figure is nearly touching 5 percent, with none of the lenders offering a rate of 2 percent.
Estimates by the central bank showed that annual household interest will increase to 2.9 trillion won ($2.4 billion) relative to the end-2020 figure if the key rate is raised by 25 basis points. The figure will spike to 5.8 trillion won following a 50-basis-point hike.
This will translate into an annual interest burden per borrower rising by 150,000 won and 300,000 won, respectively, to 2.86 million won and 3.01 million won, respectively, up from 2.71 million won.
The Financial Services Commission (FSC) said Oct. 14 that jeonse loans will not be in short supply, essentially excluding the tenants from the new rule which is measured by debt service ratio (DSR).
DSR is calculated by a borrower’s annual income divided by the principal and interest on all household loans. It is more stringent than the debt-to-income (DTI) ratio which factors in only interest payments on loans, with mortgage principal being the only principal considered. If jeonse loans are factored in, the annual principal and interest burden will increase significantly.
Measures under review include KB Kookmin Bank’s new rule whereby the maximum amount of a loan is capped at the difference in increase of the jeonse deposit between the date of the original contract and the renewal date.
For example, if the deposit has increased to 600 million won from 400 million won, the lender will limit the loan to less than the difference ― 200 million won.
This contrasts with the previous rule whereby borrowers were allowed to take out 480 million won, or 80 percent of the 600 million won in deposit.
Whether other lenders will embrace the less restrictive rule remains to be seen.
Hana Bank said Oct. 15 that it suspended all unsecured loans as well as loans for buying real estate starting Oct. 20 regardless of residential or commercial purposes, including residential buildings, shopping malls, studio apartments and land. Woori Bank has taken similar steps.
Tightening lending rules to hit young, low-income borrowers hardest
Source: Buhay Kapa PH
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