South Koreans who have lost their jobs or gone out of business would be allowed to delay repaying the principal on their loans for up to three years, starting from the second half of this year, the South Korean Financial Services Commission said in a statement.
The plan aims to reduce the debt burden on some of the country’s most vulnerable households as borrowing costs rise.
The commission would require banks and financial institutions to implement the changes this year so that qualifying borrowers can refinance their debt if they wish.
For households with mortgages to qualify for delayed repayment, the property they own must be valued at 600 million won (US$527,130) or less, and they would still need to make interest payments.
The Bank of Korea’s eight cuts in benchmark interest rates since 2012 to the current rock-bottom 1.25 percent have prompted a borrowing binge that has sent household debt to a record high.
In the fourth quarter of last year, household debt soared 11.7 percent from a year earlier to 1.344 quadrillion won, the fastest pace in more than a decade, as borrowers continued to take advantage of record low interest rates.
However, home loans and credit extended to households grew at a slower pace in the first quarter of this year compared with a year earlier, the commission said, without disclosing the total amount outstanding.
While risks stemming from rising household debt are expected to stabilize going forward, the debt servicing capacity of low-income households might fall as market interest rates rise, the regulator said.