Seoul: In a significant move to control the rising household debts, South Korea's financial regulator announced that starting next week, all local lenders will be required to substantially reduce their household lending. Home-backed loans for property purchases in the capital region will be capped at 600 million won (approximately US$442,000).
According to Yonhap News Agency, the Financial Services Commission (FSC) has mandated all local banks, insurers, and other lending institutions to decrease their target level of aggregate household loans to 50 percent of their previous targets. This also includes a 25 percent reduction in policy loans extended to low-income earners and newlyweds. The annual advisory for banks to set loan extensions at specific levels aims to mitigate the sharp rise in household debts. With these impending measures, a significant reduction in household lending is expected.
The FSC has broadened its oversight, now requiring all financial institutions, not just banks, to manage loan extensions. Mortgage loans for homes in the Seoul metropolitan area and other regulated regions will be capped at the specified amount. Initially, the regulator aimed to manage the annual growth of household debts at 75 trillion won this year but now anticipates a reduction of about 20 trillion won from earlier targets.
The move comes in response to a recent acceleration in household loan growth. In May, household loans from banks increased by 5.6 trillion won from the previous month, marking the largest monthly rise in eight months. This surge was primarily driven by increased housing transactions, with home-backed loans rising by 4.2 trillion won in May, compared to a 3.7 trillion won rise in April.
The rise in home prices, particularly in Seoul, has led to increased household debts. Apartment prices in Seoul have been climbing for 20 consecutive weeks since early February, following the easing of lending regulations and the temporary lifting of land transaction approval requirements by the Seoul city government.
This trend of rising household debts coincides with expectations of continued monetary easing by the country's central bank amid an economic slowdown. The Bank of Korea recently cut its key interest rate by a quarter percentage point to 2.5 percent to stimulate economic growth amidst sluggish domestic demand and global trade uncertainties. This marked the fourth reduction since October 2024, bringing the total policy rate cut to 1 percentage point since the easing cycle began in August 2021.