[Inside Chodong] The 'Debt Dilemma' After Policy Finance Sweeps Through

Largest Increase in Mortgage Loans in Three Years in January
Financial Authorities Shift Focus to Debt Management

‘Refinancing mortgage loans, refinancing jeonse loans, special loans for newborns, interest cashback for small business owners, customized corporate financing’

These are the livelihood and economic support measures introduced by the government from the beginning of the year by mobilizing the financial sector. The purpose of policy finance is to reduce the burden on economic actors such as households, companies, and small business owners, to defend the frozen economy, and to support future growth industries. Even just customized corporate financing amounts to 76 trillion won, so a simple calculation shows that the total far exceeds 100 trillion won.

With policy finance, households and companies have immediately reduced some of their interest burdens. Through mortgage refinancing, households enjoyed an average interest rate reduction of 1.55 percentage points, saving 2.94 million won annually in loan interest, and through jeonse loan refinancing, they reduced interest rates by 1.35 percentage points and cut annual interest costs by 1.92 million won. Additionally, with the 40 trillion won scale special loans for newborns, which are free from loan regulations, individuals can use mortgage loans up to 500 million won at a minimum annual interest rate of 1.6%. Customized corporate financing lowered interest rates by up to 1.2 percentage points for advanced industries and opened the way to support high-interest loans over 5% for small and medium enterprises by up to 2 percentage points for one year.

The interest burden relief policies that poured out at the beginning of the year also stirred market interest rates. Artificially lowered rates began to affect the interest rates of general loan products. Major commercial banks competitively lowered the lower bound of mixed-type (5-year fixed) mortgage loan rates to the low 3% range and variable rates to the low 4% range to prevent customer attrition. The Financial Services Commission also announced that the general new mortgage loan interest rates fell by 0.4 to 1.4 percentage points due to the refinancing effect.

However, ironically, as living costs soared sharply and market interest rates fell, debt began to rise first. Assuming a virtuous cycle of financial policy, the best scenario would be that economic actors with reduced interest burdens create new added value or increase previously reduced consumption to invigorate the economy, but reality did not fully align with this.

According to the January consumer price index released recently by Statistics Korea, the fresh food index soared 14.4% compared to last year, marking the largest increase since 2017. Kim Woong, Deputy Governor of the Bank of Korea, who chaired a meeting to review the price situation, also expressed concerns about inflation uncertainty, stating that “living costs remain at a high level.”

During the same period, the balance of mortgage loans, a key indicator of private debt, increased by 4.9 trillion won to 855.3 trillion won. This is the largest increase since January 2021. Contrary to expectations, one commercial bank reported that the mortgage loan increase rate in January alone reached 0.8%, raising the need for early management. Although the government announced in January that it would manage the household debt growth rate within the nominal growth rate this year, and the five major financial holding companies pledged to keep the growth rate between 1.5% and 2.0%, the first month already showed signs of faltering.

On the surface, the government expresses confidence in managing inflation and debt, calling it a “manageable level,” but it is also sending sharp messages targeting the financial sector. Considering corporate debt, which ranks third in the world at 126% of GDP, views that confidence alone is insufficient are increasing, prompting the government to start considering holding a separate policy briefing under the theme that ‘policy finance and debt management directions do not conflict with each other.’

The financial authorities will strengthen household debt management starting from the 26th. They will begin applying the ‘stress total debt service ratio (DSR)’ to bank mortgage loans and plan to expand it to the entire financial sector by the end of the year, while gradually raising the stress interest rate. After the whirlwind of policy finance, whether the public will perceive this transition as an awkward ‘sudden turn’ or accept it as a scheduled ‘step’ is a time the government must fully handle.