Housing-related lending in South Korea is undergoing a shift, with commercial bank loans declining under tighter debt regulations while overall housing credit continues to grow, driven by low-interest government-backed policy loans.

Korea’s five major banks - KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup - reported Thursday that outstanding housing-related loans stood at 563.86 trillion won ($392.3 billion) as of April 29th, 2025, up 8.32 trillion won from 555.55 trillion won at the end of December 2024. During this period, policy loans aimed at lower-income borrowers rose by 12.1 trillion won while bank-originated loans fell by approximately 3.78 trillion won.

The trend reflects the financial authorities’ continued emphasis on household debt control, which has kept mortgage and lease loan rates elevated at commercial banks. This has led to growing calls for a more balanced regulatory approach as many borrowers who do not qualify for policy loans are left with fewer affordable options.

Policy loans are government and public-agency-backed financial products designed to support housing stability. They offer lower interest rates than commercial loans but are subject to strict eligibility criteria. One of the most popular programs is available to first-time homebuyers with annual income below 60 million won purchasing homes under 500 million won, offering up to 250 million won at rates between two and three percent.

The balance of policy mortgage loans increased by 8.44 trillion won from 43.42 trillion to 51.86 trillion won between late December 2024 and late April 2025. Policy-backed lease deposit loans also grew by 3.66 trillion won, signaling balanced expansion across both mortgage and lease segments.

While the rise in policy lending is viewed as helping low-income households secure financing at reasonable rates, it has also reignited debate within the financial sector. Some argue that regulatory pressure on commercial banks should be eased given that most of the recent increase in household lending stems from policy programs.

Financial regulators have enforced tight controls on household debt since 2023, warning of its risk to economic stability. A more rigorous three-stage debt service ratio (DSR) stress test is set to take effect in July 2025, which will significantly limit the total debt individual borrowers can take on.

“Given that commercial banks’ lending is actually decreasing, it is questionable whether the high-intensity household debt crackdown should continue,” an industry official said.

Persistently high lending rates at banks remain a concern, with commercial banks slow to reflect recent base rate cuts in their lending products due to regulatory scrutiny. Borrowers who are ineligible for policy loans are left with no options but high-interest rate loans, raising questions about fairness in credit access.

For their parts, banks are increasingly concerned about the prolonged contraction in their housing loan portfolios. If the trend persists through to the end of 2025, it could begin affecting earnings as early as 2026 and banks are already taking steps to slow the decline.

Shinhan Bank, for example, will ease risk management rules on lease deposit loans from Friday onwards. It will now permit such loans involving landlord changes outside of Seoul and will reduce the rate on its government-guaranteed lease loan product by 0.2 percentage points.

[ⓒ 매일경제 & mk.co.kr, 무단 전재, 재배포 및 AI학습 이용 금지]