South Korea set to extend eased mortgage rules for another year

The government will extend a temporary measure to ease mortgage regulations for another year in a bid to prop up the local economy that is showing budding signs of recovery, the financial watchdog said Tuesday.

In August last year, newly minted Finance Minister Choi Kyung-hwan announced the eased rules in order to give home buyers greater access to mortgages and thus help boost the sluggish local housing market as well as the overall economy.

The loan-to-value (LTV) ratio was adjusted to 70 percent at large, up from a range of 50 to 85 percent depending on where the home is located, while the debt-to-income (DTI) ratio was set at a uniform rate of 60 percent. The two ratios are aimed at controlling the amount of loans available to home buyers based on their income and ability to pay back debt.

The Financial Supervisory Service (FSS) said the relaxed LTV-DTI measures will be extended until the end of July 2016 as it has helped to normalize the housing market and had a positive impact on the national economy.

"The local property market has been apparently on a recovery track since the government eased the LTV-DTI regulations, despite the fast-increasing household loans," it said.

According to government data, South Korea's home transactions jumped 29.1 percent on-year to a record 610,796 through June, while the number of construction permits issued for new homes climbed 36 percent-on-year to a 12-year high of 300,080 in the first half.

However, economists point out that ballooning household debt can be a big drag on Asia's fourth-largest economy, which is floundering due to a slump in outbound shipments and local consumption.

The amount of the country's household debt extended by banks and non-banking institutions reached a record high of 1,099 trillion won (US$948 billion) as of end-March, according to separate data from the Bank of Korea.

Last week, the Financial Services Commission (FSC), the top financial regulating body, released a set of measures to tackle the mounting household debt.

The FSC said it will encourage local lenders to handle more fixed-rate and amortized loans, instead of floating-rate mortgages, raising the percentage of such loans to 40 percent of the total home-backed loans by 2017 from 25 percent tallied in 2014.