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Falling mortgage loan interest rate stokes debt worries

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Published : 2015-01-18 10:36
Updated : 2015-01-18 10:36

The interest rate for home-backed loans at South Korean lenders fell below the 3 percent threshold, industry data showed Sunday, raising concerns the trend will further stoke the country's already sizable household debt.


The fixed interest rate for mortgage loans at Korea Exchange Bank, which are due to shift to a floating rate scheme three years later, sank to 2.85 percent as of Friday. The interest rate for loans due to shift five years later also dropped to 2.98 percent.


"Many customers can now borrow at an interest rate in the high 2 percent level. We cannot rule out a further fall in the interest rate since market rates are on a decline," an official at the lender said.


The interest rates at other major lenders have also fallen below the 3 percent mark. The fixed interest rate at Hana Bank reached 2.92 percent Friday, while that at Woori Bank fell to 2.91 percent.


While the fall in interest rates may be good news for home buyers, it comes as a major concern for the Korean economy that is grappling to rein in ballooning household debt.


Following two policy rate cuts, in August and October, last year, the country's household debt has surpassed the 1,000 trillion won ($928 billion) mark. Loans extended by banks increased by a record 37 trillion won over the past year, with over 20 trillion won of the gain posted in the past three months.


Economists say that while borrowing may seem cheap for households at the moment, it may hamper their capacity to spend once interest rates begin to trend higher.


"The problem is that households will be weighed down with growing household debt when interest rates begin to climb. It will worsen consumption, which is the biggest factor for the country's economic slump," said Lee Joon-hyup, an economist at Hyundai Research Institute.


Professor Kim Sang-jo of Hansung University said the government should step up measures to control household debt.


"Since the household debt is a 'time bomb' for the Korean economy, the government should implement policies with an aim to lower the portion of household debt against the gross domestic product." (Yonhap)