The financial buzzword that Koreans have recently heard a lot is “ansim jeonhwan daechul,” which literally means a relief switch loan. It is a state-led debt restructuring program tailored just for mortgage borrowers.
The nation’s commercial banks sold the new lower loan product on two occasions for two weeks, with the funds raised by the state-run Korea Housing Finance Corp.
The market response was surprisingly explosive. TV footage showed a long queue of customers waiting to apply for the switch loans inside a Seoul bank. Some news media even described the high popularity of the new mortgage loan as “a whirlwind” that swept the nation.
In just four days after the launch of the loan program on March 24, the limit of the 20 trillion won fund ran out and the government had to rearrange a second batch of funds worth 14 trillion won.
About 350,000 household borrowers are expected to benefit from the switch loan, and the government received public feedback that it was successful, despite lingering controversy over the equity of beneficiaries.
Chairman Yim Jong-yong of the Financial Services Commission, who designed the loan program, admitted that his organization had not expected it to be so popular. He also expected that the switch to the lower mortgage program would generate an annual reduction of 1 trillion won from the nation’s household debt.
The reason why the government introduced the new mortgage program is simple ― it was designed to help borrowers reduce their heavy financial burden, but it was also an apparent preemptive measure to counter the steep rise of household debt, widely dubbed as the “detonator of the Korean economy.”
According to the central bank’s statistics, Korea’s household loans reached 1,089 trillion won as of the end of last year, with mortgage loans amounting to 460.6 trillion won, 42 percent of the total.
As government officials have hoped, the new program would likely help lighten borrowers’ debt-servicing burden as they will be able to convert their short-term floating-rate mortgages into longer and lower fixed-rate ones. What attracted consumers was the loans’ rate, which ranges from 2.5 percent to 2.7 percent, far lower than the average rate of 3.5 percent for floating-rate mortgages.
As a result, we can expect the structure of household debt will change in a positive way as the new loan program calls for people to repay loans from the beginning.
Nevertheless, we cannot definitely say we will be able to stay away from the risk of financial volatility in the wake of household debt. But it is not an exaggeration to say that at least the new loan program will improve the soundness of household liabilities. This is because most mortgage bank loans are nonamortized, in which debtors should repay the lump sum principal upon maturity. This type of loan, most common in Korea, will pose a greater risk at a time of falling home prices or the fluctuation of key interest rates.
Now it is time for financial authorities to follow up on measures to minimize the possible side effects of the new convert loan program.
One of them is that the government should address the issue of equity raised by financial consumers who were excluded from the relief mortgage program. They are mainly banking mortgage holders who repay the principal with fixed-rate interest and users of nonbanking financial institutions like savings banks and insurance companies.
It is urgent that a similar step should be applied to people who borrowed loans from savings banks or community credit cooperatives as they are considered to have a lower income or credit rating and to be in a more financially difficult state.
To basically relieve the country of its growing household debt, the government should deal with the problem of those who suffer from high interest rate loans borrowed from nonbanking institutions.
The financial authorities also need to take a close look at whether the state-led debt restructuring program will negatively affect the financial soundness of commercial banks that sold the loan product. This is because the interest rate of the switch loan is far cheaper than the one banks are currently selling.
Financial analysts predict that banks will likely suffer bigger margin losses of 500 billion won from the expanded relief loans in the long term.
Finally, financial policymakers are urged to use the successful loan policy implementation as an occasion to expand microfinance products with a lower interest rate for low-income brackets and ease regulations so that they can get easy access to the loans.
Along with this, they should not sit idle in monitoring and correcting excessively high interest rates for those in a financial crunch by private moneylenders, who are dubbed “loan sharks.”
By Shin Yong-bae
Shin Yong-bae is the business editor of The Korea Herald. He can be reached at shinyb@heraldcorp.com. ― Ed.
