Gov’t Rolls Out Household Debt Measures open the window of AOD

Write : 2017-10-29

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The government has rolled out comprehensive new measures to curb the growth of household debt.
The key to the set of measures announced Tuesday is to ensure people can only borrow as much as they are able to pay back.
To prevent speculative real estate transactions, the ceiling on second home mortgage loans will be further tightened from next year.
A new debt-to-income ratio(DTI) will be introduced in January. The new method will reflect the principal repayment amount in existing mortgage loans when the borrower takes out another mortgage.
Also starting August 2018, an individual's total debt will be managed in a more comprehensive manner.
Financial institutions will adopt a new restriction called the debt service ratio(DSR) as an indicator to their risk management. This means deliberations on mortgage loans will be more in-depth, taking into account an applicant's other loans and overdrafts.
With these measures, the government aims to restrict the annual growth in household debt to about eight percent.
However, support will increase for low-income households and owners of small businesses who are struggling to pay off their debts. For those who can't keep up with repayments due to job loss or business closures, a maximum three-year grace period will be granted on the payment of the principal amount.
The spread on overdue payments will also be lowered to the three to five percent range.
A debt exemption will also be sought for some 400-thousand people who have failed to pay back loans of less than ten million won for more than ten years.
The government will also push for income-led economic growth to increase overall income aimed at easing the debt burden.
Concerns have been growing that household debt can hinder domestic growth and possibly trigger an economic crisis.
As of late August, the nation's household debt is believed to have surpassed 1.4 quadrillion won. It accounted for 93% of GDP as of late last year.
The government claims that the qualitative structure of household debt has improved and therefore doesn't pose an immediate risk to the financial system. But it is certainly viewed as a potential threat.
The comprehensive measures are designed to preemptively respond to the debt issue and eliminate related risks. In particular, measures to restrict mortgage loans in connection to speculative home purchases are viewed in a positive light.

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