Low Mortgage Rates and Increasing Household Debt

by Dana Marie / Aug 13, 2015 04:50 AM EDT

Morning sunlight illuminates residential properties north of the Han River, backdropped by mountains and skyscrapers in the Gangnam business district

(Photo : By:Dan Istitene | Getty Images News) Morning sunlight illuminates residential properties north of the Han River, backdropped by mountains and skyscrapers in the Gangnam business district

For the first time, since data on loans have been compiled, South Korea's household debt has exceeded 600 trillion won ($512 billion). Despite the government's efforts to control borrowing, the total amount has continued to rise. And small business owners - e.g. restaurateurs - are among those with the highest new loans.

The Bank of Korea (BOK) has reported on August 12 that household debt in July has amounted to 601.9 trillion won, including loans that have just been taken out - which have amounted to 7.4 trillion won. The increasing debt mostly comprises mortgages, accounting for 74% at 446.1 trillion won - including new loans worth 6.5 trillion won. While the amount is lesser than new loans in June at 6.8 trillion won, the total amount of housing loans last month is considerably high nonetheless.

In fact, it's more than twice the 2.8 trillion won worth of new loans taken out on July 2014 and even higher than the 1.8 trillion won on July 2013. On the other hand, the new mortgages on July 2014 have amounted to 2.6 trillion won.

The country's central bank has commented that this increase is partly due to the property market's revitalization through reduced policy rates and deregulation, which the government has pushed in the second half of 2014.

According to BOK official Yoon Dae-hyun, "The low interest rate and the increase in housing transactions have helped increase mortgages more than a year ago". He adds that bigger spending in summer has contributed also to bigger loans.

Officials have decided to ease major restrictions on mortgages - the debt-to-income ratio and loan-to-value ratio - to jumpstart the property market after it has been greatly affected by the global financial crisis since 2008. However, this bold decision hasn't been effective until the Bank of Korea lessened policy rates on August 2014. Then, the real estate market gained momentum a month after the central bank suddenly reduced borrowing rates to 1.5% in March to revive the nation's slow economy.

During this period, the housing loans taken out have only amounted to 4.8 trillion won. It increased by almost 50% - at 8 trillion won - in April. With lower mortgage rates also come high housing transactions in July, up by 43.2% from the same period last year. The combined house sales from January to July have increased by 31%, while housing transactions in the capital city has increased by 101.3% compared to 2014.