Regulator unveils steps to improve quality of household debts

South Korea's top financial regulator said Thursday that local lenders will start providing some 20 trillion won ($18.2 billion) worth of long-term fixed-rate loans next month to households seeking to refinance their mortgage lending at cheaper rates as part of an effort to improve the quality of ballooning household debts that could pose a threat to the economy.
  

The Financial Services Commission said the new loans will help household borrowers convert short-term floating interest rate loans into long-term and fixed rate loans, so that they can steadily repay the loans over a long term.
  

Such instruments will start being sold by local lenders on March 24, and be extended at a 2-percent level, it added. The country's key policy rate stands at a record of 2 percent.
  

The Korea Housing Finance Corp. will issue mortgage-backed securities (MBS) to fund the new loans.
  

The FSC said that the new loans are aimed at changing the structure of mortgage loans and placing the household debts under control.
  

"We are supporting households to deal with a possible rate hike in the future at home and abroad, and build an environment for them to pay off debts in the end," the FSC said.  
  

Most of the home-backed bank loans are non-amortized loans, requiring debtors to pay back the lump sum principal upon maturity. Such loans are heavily susceptible to changing interest rates.
  

Earlier, FSC Chairman Shin Je-yoon said restructuring of household debt is a top priority for financial stability in 2015, and he will do his best to improve the quality of household debts.
  

According to government data, total household lending by local lenders and non-banking institutions reached 1,002.9 trillion won as of end-September last year, piercing the 1,000 trillion won mark for the first time.
  

Out of the total family loans, mortgage-backed loans accounted for 55.3 percent at 554.6 trillion won.
  

The pace of gains of household credits has been faster since August when government eased rules on mortgage loans to stimulate the sagging property market. The central bank chipped in by lowering its policy rate twice in the second half of the year. (Yonhap)