South Korea Plans to Tighten Mortgage Rules

South Korea will impose fresh mortgage curbs for owners of multiple homes to put a brake on binge borrowing, amid concerns a build-up in household debt could leave the economy exposed to a crash, the government said on Tuesday.

Starting 2018, borrowers applying for mortgages on second homes will see tightened loan limits, with lenders required to include principal balance of the borrowers’ existing debt in measuring their credit worthiness for new loans, Reuters reported.

Currently, debt repayment is limited to 40% of home buyers’ annual income in Seoul and its outskirts, and banks’ measure of debt obligations only include interest payments and not the principal balance.

The new rules will aim to better assess borrowers’ debt obligations from the first home to prevent binge borrowing, at a time when the nation’s household debt is expanding at a double-digit pace and crimping private consumption.

“Excessive household debt expansion leads to increasing debt repayment burdens and restrains private consumption and economic growth,” the finance ministry and regulator said in a joint statement.

The sum of home loans, credit purchases and other household borrowing totaled 1,388.3 trillion won ($1.23 trillion) as of the second quarter this year, up 10.4% from a year earlier.

The new rules follow the Bank of Korea’s policy meeting last week, at which it held interest rates at a record low but at which a dissenting board member called for a rate hike amid a stronger outlook for growth. The dissenting vote prompted some economists to bring forward the timing of a rate hike at the Bank of Korea to the Nov. 30 meeting.

As of the end of 2016, South Korea’s household debt-to-gross domestic product stood at 95.6%, above the average of 70% for the members of the Organization for Economic Cooperation and Development.

High-speed household debt growth is a concern especially as economists expect the Bank of Korea to increase policy rates in the coming months, which may raise debt repayment burdens for vulnerable homes.

Twelve out of 20 economists polled by Reuters on Oct. 17 saw the BoK hiking key interest rates during the first half of 2018, ending an easing cycle that began in 2011.

As the International Monetary Fund saw the country’s household debt situation as “manageable”, the government reiterated the economy can sufficiently manage the debt.

Of the 1,400 trillion won debt, 320,000 households with 92 trillion won debt are facing difficulties in paying back the money they owe to banks and mutual savings banks. This is because they have a negative cash flow, meaning their monthly paychecks are not enough to meet their debt obligations.