[Second Half Economic Policy] Encourage Fixed-Rate Loans and Reduce Loan Burden for Vulnerable Groups

Ministry of Economy and Finance Announces 'Second Half Economic Policy Direction'
Lower Prepayment Penalties When Switching from Variable to Fixed Interest Rates
Interest Rate Cuts for Vulnerable Borrowers, Reduced Interest Costs on Delinquency

The government is encouraging citizens to take out loans with fixed interest rates to manage household debt and is improving loan systems for low-credit and vulnerable borrowers. According to the 'Second Half Economic Policy Direction' announced by the Ministry of Economy and Finance on the 4th, measures will be pursued to reduce the prepayment penalty burden when financial consumers refinance variable-rate loans into fixed-rate loans to improve the quality of household debt.

This is a response to the sharp increase in interest rates for variable-rate debtors, led by the so-called 'Yeongkkeuljok' during last year's interest rate hike period, which increased repayment burdens. Currently, the prepayment penalty is 1.2% for variable-rate loans and 1.4% for fixed-rate loans. The government plans to lower the prepayment penalty for fixed-rate loans and also ease the prepayment penalty imposed when refinancing from variable to fixed rates.

Interest rate reductions for vulnerable borrowers have also been implemented. Since April this year, the Credit Recovery Committee has reduced the contracted interest rates of existing loans by 30-50% considering the repayment ability of low-credit vulnerable borrowers and extended the installment repayment period up to 10 years. Eligible borrowers include those with delinquency of 30 days or less, or those without delinquency but with personal credit scores in the bottom 20%, or those facing delinquency risks such as unemployed, unpaid leave, or business closure.

A system is also being prepared to reduce interest costs and allow individual debtors to apply for debt adjustment to alleviate delinquency burdens. To this end, the financial authorities submitted the 'Personal Debtor Protection Act' to the National Assembly in December last year. The core of this act is to significantly reduce delinquency burdens by limiting the interest charged on delinquent payments from 'all debts' to 'delayed interest' for vulnerable groups. It also includes provisions requiring financial institutions to notify debtors in advance of the opportunity to apply for debt adjustment when selling delinquent claims to collection agencies such as loan sharks or when attempting to auction homes.

Real Estate PF Risk Management through KAMCO

To manage risks in real estate project financing (PF), the government announced plans to utilize the PF project normalization fund of the Korea Asset Management Corporation (KAMCO). A government official stated, "Currently, the fund is about 1 trillion won in size, but we will expand it considering investment demand and fiscal capacity if necessary."

The Housing and Urban Guarantee Corporation (HUG) will also increase the guarantee ratio for interim payment loans from 80% to 90%. This aims to reduce the risk of banks failing to recover loans related to real estate PF. Guarantee requirements for PF loans to construction companies will be eased as well. In addition to discounting the sale price when reviewing unsold PF loan guarantees, efforts such as free balcony expansions will be reflected as self-help measures.

Support will also be provided for construction companies issuing corporate bonds. A government official said, "We will promote cases of voluntary agreement funds between private construction companies and financial institutions and encourage participation from main creditor banks," adding, "We are also reviewing ways to utilize guarantees from the Construction Mutual Aid Association."

[Image source=Yonhap News]

Expanding Loss Absorption Capacity for Household Debt and Financial Crises

The capacity to absorb losses related to household debt defaults will also be increased. Banks will introduce counter-cyclical and stress buffer capital systems. In the mutual finance sector, the reserve ratio for real estate and construction loans will be raised from the current 100% to 130%.

The foundation for managing non-performing loans will be expanded. Currently, KAMCO is the sole institution purchasing individual delinquent claims, but specialized securitization companies will be added.

Measures to prepare for financial institution crises will also be established. The Bank of Korea is preparing to revise systems to enable quick and easy lending to financial institutions in distress in response to digital bank loans. A government official stated, "The Deposit Insurance Corporation will also introduce a financial stability account." The financial stability account is a system that provides liquidity support from the deposit insurance fund when financial companies face temporary cash shortages.

The operation period of the Industrial Stabilization Fund, currently set until 2025, will be extended, and the support purposes and industries will be reexamined. The current supported industries include aviation, shipping, automobile, shipbuilding, machinery, and steel.