Strong Crackdown on Debt Investment... Principal and Interest of Credit Loans Must Be Repaid Together

Repaying 1 Billion KRW at 3% Annual Interest Requires 1.88 Million KRW Monthly
40-Year Mortgage Loan Product Under Review for Youth Housing Stability

[Asia Economy Reporter Kwangho Lee] The government is set to tighten regulations on high-risk credit loans. Currently, credit loans only require monthly interest payments until maturity, but going forward, both principal and interest must be repaid together. The government's intention is to monitor and manage the recent surge in household debt, but there are concerns that this could lead to a 'balloon effect' in non-bank sectors such as savings banks and mutual finance institutions.

According to the Financial Services Commission on the 20th, the 'Advanced Household Debt Management Plan' to be prepared in the first quarter of this year will include a policy to mandate principal installment repayments on high-value credit loans.

This means that for high-value loans, borrowers will be required to repay both principal and interest monthly. For example, if a credit loan of 100 million KRW is borrowed at an annual interest rate of 3% with a 5-year term, under the current lump-sum repayment at maturity system, only 2.5 million KRW in interest is paid monthly (30 million KRW annually), and the principal of 100 million KRW is repaid at maturity. However, under an equal principal and interest repayment plan, about 1.8 million KRW must be paid monthly. This means monthly debt repayment increases by approximately 1.55 million KRW.

A Financial Services Commission official said, "Details such as the applicable amount and repayment method are expected to be announced as early as March," adding, "The work plan only outlines the general direction."

Concerns are growing within the financial sector. A bank official said, "If high-value credit loans are restricted, there could be a balloon effect where loan demand shifts to secondary financial institutions," expressing worries about the significant impact on the market. Another official pointed out, "This measure is a response to the surge in housing loans due to failed real estate policies and rising house prices aimed at curbing high-value credit loans." At the end of last year, financial authorities had prepared a plan requiring borrowers with credit loans exceeding 100 million KRW to immediately repay those loans if purchasing homes in regulated areas.

The advanced household debt management plan also includes changing the management of the Debt Service Ratio (DSR) by financial institutions to assess repayment ability on a borrower-by-borrower basis. A uniform DSR of 40% will be applied to all borrowers. Additionally, the DSR calculation method will be revised to better reflect the borrower's actual repayment capacity.

The government is also reviewing mortgage products with repayment terms of up to 40 years, allowing repayment of principal and interest, to stabilize housing for young people and others. This aims to provide opportunities for homeownership to young people frustrated by soaring housing prices.

Financial Services Commission Chairman Eun Sung-soo said when announcing this year’s work plan, "It is time to consider introducing 30- or 40-year mortgages like those abroad, so that people can repay monthly as if paying rent and eventually own their homes," adding, "However, if variable interest rates are applied, risks increase, so we are considering various options including financial support." He further stated, "The financial sector is also preparing ways for young people to own homes with their current income."

Long-term mortgages have already been introduced in advanced countries. The United States offers 40- to 50-year mortgages, and Japan has the 35-year fixed-rate mortgage 'FLAT35' and the 50-year 'FLAT 50.'

The Financial Services Commission plans to review specific operational methods for mortgages and conduct a pilot loan program through the Korea Housing Finance Corporation in the second half of this year. Loan recipients will include young people, newlyweds, and first-time homebuyers.