Tighter bank lending rules aimed at curbing household debt have pushed loan demand from people who do not own a home into South Korea's non-bank financial sector, creating what analysts describe as a balloon effect. Critics say the one-size-fits-all approach to restraining debt is raising interest costs for owner-occupier buyers.
Insurers approved 1.39 trillion won ($974 million) in mortgages for first-time home purchases in the first eight months of this year, 6.2 times the 223.8 billion won approved over all of last year, according to data obtained by the office of Rep. Park Jun-tae of the People Power Party and released on the 15th. The number of approvals reached 3,046, more than quadruple the 720 recorded for all of last year. First-time home purchase mortgages are the main loan product used by buyers who do not own a home and are buying a place to live in.
The shift in demand is attributed largely to the third phase of the stressed debt service ratio (DSR) rules and the household loan growth caps introduced this year. Financial regulators fully implemented the third stage of the stressed DSR framework in July last year, reducing borrowing limits to account for the risk of future rate increases. Since the start of this year, authorities have held annual household loan growth to 1.5%, raising loan margins and tightening reviews of borrowing limits.
As a result, buyers who do not own a home and intend to live in the property appear to have moved to insurers after failing to meet commercial banks' DSR threshold of 40% and secure the loan amounts they needed. Under current rules, the DSR ceiling for insurers is 50%, 10 percentage points higher than at commercial banks. That allows borrowers to obtain larger loans but at higher interest rates. Insurers, which manage long-term funds, can also more easily offer mortgages with maturities of 40 to 50 years, lowering annual repayments and making it easier to meet DSR limits — another factor behind the rise in demand.
Average DSR levels on newly extended loans were about 7 percentage points higher at insurers than at commercial banks. First-time home purchase mortgages approved by insurers this year carried an average loan-to-value (LTV) ratio of 62% and a DSR of 39%, compared with 72% and 39% last year. The LTV ratio fell while the DSR held roughly steady. At commercial banks, the average LTV ratio fell to 65.8% this year from 71.8% last year, and the average DSR declined to 31.8% from 34.1%.