South Korea's increased lending capacity unlikely to boost general home loans

Despite an increase in household lending capacity by roughly 30 trillion won this year, its effect on general home loans is anticipated to be minimal, according to a report from Hana Securities. The increased capacity is largely expected to be directed towards collective financing, including moving expenses, down payments, and final payment loans, as well as youth support programs.

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The increased lending capacity will mostly be used for moving expenses, down payments, and final payment loans, or for youth support, and the possibility of expansion to general home loans is not high.

Choi Jeong-wook, a Hana Securities analyst, stated in a report that the primary purpose of raising the total debt regulation limit from 1.5% to 3% was to facilitate the supply of collective loans, which had been hindering housing supply expansion. The Financial Services Commission (FSC) is also preparing measures to prioritize collective lending by banks. The FSC plans to manage the additional 30 trillion won capacity by allocating it to general loans, policy loans, and a reserve.

Under this plan, collective loan amounts handled by banks can be deducted from the reserve, not general loans. However, the specific size of the reserve and the deduction method are yet to be determined. The report also suggests that upcoming stricter capital regulations for high-risk home loans, set to be enforced from January next year, will have a limited impact. These regulations involve increasing the risk weight for mortgages with high debt-to-income ratios, loan-to-value ratios, and loan amounts relative to housing prices, which would increase the capital burden for banks.

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The intention behind raising the total debt regulation is to facilitate the supply of moving expenses, down payments, and final payment loans, which have been obstacles to housing supply expansion.

However, analyst Park believes the negative impact on capital ratios will not be substantial. The FSC had previously announced plans to raise the risk weight for certain high-risk home loans starting in January. This measure aims to ensure banks maintain adequate capital reserves against potential risks in their loan portfolios. The risk weight is a multiplier applied to assets based on their perceived riskiness, and banks are required to maintain a certain ratio of capital to risk-weighted assets.

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Although it may be negative for capital ratios, the impact is not expected to be very large.