Seoul: All local lenders in South Korea will be required to significantly curtail their household lending, while mortgages for home purchases in the capital area will be capped at 600 million won (approximately US$442,000). This move, announced by the financial regulator on Friday, marks a significant step to address rising household debts.
According to Yonhap News Agency, starting next week, banks, insurers, and other lending institutions will need to reduce their aggregate household loan targets to 50 percent of previous levels, as directed by the Financial Services Commission (FSC). Policy loans for low-income earners and newlyweds will see a 25 percent reduction in their targets. These measures are aimed at managing the sharp increase in household debts.
Historically, banks set loan extension levels annually to control household debt growth. These new measures are expected to lead to a significant reduction in household lending by financial institutions. Additionally, financial institutions beyond banks will now have to manage their loan extensions under government oversight.
The cap on mortgage loans for home purchases in Seoul and neighboring areas comes as a response to the accelerating growth of household loans. In May alone, household loans from banks increased by 5.6 trillion won, marking the largest monthly rise in eight months. This surge was largely fueled by housing transactions.
The rise in household debt correlates with increasing home prices. Seoul's apartment prices have been rising for 20 consecutive weeks, gaining momentum after previous regulatory relaxations. This trend is compounded by the central bank's monetary policies. The Bank of Korea recently cut its key interest rate to 2.5 percent to stimulate economic growth amid ongoing economic challenges. This rate cut is part of a broader monetary easing strategy that began in October 2024.