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Tighter criteria for new mortgage loans to go into effect next year

Dec. 3, 2015 - 16:28 By KH디지털2

South Korea's top financial regulator said Thursday that it will unveil a tighter mortgage loan screening system later this month in a bid to tackle the mounting household debt in the face of a potential U.S. rate hike.
 

Household credit totaled a fresh record of 1,166.4 trillion won ($1.01 trillion) as of end-September, up from a revised 1,131.5 trillion three months earlier, according to the latest central bank data.
  

The third-quarter figure marks the highest level since the central bank began compiling the data in 2002, and the on-quarter expansion of 3 percent also broke the record pace in the previous quarter.
  

The Financial Service Commission, the country's financial market regulatory body, announced a new screening system in July for home-backed loans in a bid to curb the growth pace of household debt.
  

Starting next year, banks will be allowed to issue loans only after assessing a borrower's debt repayment ability -- their annual income -- rather than the value of collateral alone.
  

The total debt service ratio, the proportion of one's total housing-related loans and other payments to gross income, will be used as a rule of thumb to measure whether the borrower is already highly indebted.
  

Also, mortgage lenders will apply an interest rate stress test that checks whether borrowers could still afford their mortgages in case of future interest rate hikes.
  

"We're looking into possible consequences and responses from banks and borrowers when the new system goes into effect next year," FSC Chairman Yim Jong-yong said in a monthly press briefing. "After wrapping up the process, the Korea Federation of Banks will announce it later this month."
  

"The new plan will target newly extended household loans only. We will make many exceptions for it in order to prevent a sudden impact on the market," said Yim.


The FSC chairman also noted that the financial authorities are conducting a thorough debt risk test on 330 large companies and the results will be announced later this month.
  

Last month, the Financial Supervisory Service, the financial oversight body, disclosed a list of 175 small and medium enterprises whose balance sheets are too shaky, as part of government-led efforts to sort out highly indebted firms and prevent their sudden collapse.
  

The Seoul government has called for harsh corporate restructuring, pushing local banks and financial institutions to eliminate highly indebted and unprofitable companies from the market amid lingering economic uncertainties at home and abroad. (Yonhap)