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Higher mortgage rates in S.Korea increase debt-servicing burden

Xinhua, October 27, 2016 Adjust font size:

Higher mortgage loan rates in South Korea, caused by the expected interest rate hike in the United States and the government's efforts to curb household debts, increased debt-servicing burden among households, central bank data showed on Thursday.

Rates for new home-backed loans by banks averaged an annualized rate of 2.80 percent in September, up 0.10 percentage point from the previous month, according to the Bank of Korea (BOK). The mortgage rate kept rising from 2.66 percent in July to 2.70 percent in August.

Higher mortgage loan rates came on expectations that the U.S. Federal Reserve would raise interest rates in December. The government's measures announced in late August to curb surging household debts led banks to tighten standards for loans to households.

Higher interest rates are expected to increase debt-servicing burden for households, which have been encouraged to purchase home with borrowed money amid the record-low interest rates.

The BOK lowered its benchmark interest rate from 3.25 percent in July 2014 to an all-time low of 1.25 percent in June this year. The government eased regulations on mortgage financing by lifting the debt-to-income (DTI) and loan-to-value (LTV) ratios.

The lower rate was originally aimed at boosting corporate investment and job creation, but companies were reluctant to hire people and spend capital on concerns about economic uncertainties at home and abroad.

The government removed a ceiling on new apartment prices, which was introduced to curb a real estate bubble, while encouraging the transaction of right to purchase new apartments with a variety of deregulations.

Rates for credit loans to households increased 0.07 percentage points from a month earlier to 4.31 percent in September.

Corporate loan rates by banks, however, inched down 0.01 percentage point to 3.37 percent as loans to big companies declined 0.02 percentage points compared with the prior month. Endit