The amount of mortgage-backed loans extended by financial institutions for living expenses has increased by a whopping 8.4 trillion won ($7.7 billion) in the past year in South Korea, raising concerns over the rapidly deteriorating quality of household debt.

According to multiple sources from the financial industry on Tuesday, the total amount of home-backed loans extended by five local commercial banks (Shinhan, NH Nonghyup, KB Kookmin, KEB Hana, and Woori) for purposes other than home buying reached 135.6 trillion won as of the end of July, up 6.6 percent or 8.4 trillion won from 127.2 trillion won in the same period last year.

The increase accelerated in recent months amid little sign of improvement in the economy. The amount of home-backed loans used for living expenses increased 5.1 percent on year in January before falling to 1.8 percent in May. The pace picked up to 6.8 percent in June and 6.6 percent in July.

Amid stagnant income and economy, consumers have turned to low-interest bank loans backed by their homes, which are the biggest assets for most Koreans, to get by.

But mortgage loans to finance living expenses especially for retirees have the risk of turning bad. Many retirees that started business with their severance pay and savings are running their business with loans lent out by their homes due to slow-moving economy.

“It is highly risky to borrow loans for living and business expenses because of increased loan limit from temporary spike in real estate prices,” said Lim Jin, a researcher at Korea Institute of Finance.

There are 7.15 million first baby boom generation born between 1955 and 1963 that have retired or are expected to retire over the next several years. There are also 6.68 million second baby boom generation born between 1968 and 1974. When they retire, industry observers expect the amount of home-backed loans used for living expenses to increase even more.

Mortgage-backed loans jumped after the easing in consumer loan regulations to boost the property market in 2014 through hike in the loan-to-value (LTV) ratio from 60 percent to 70 percent and rise in home prices.

Many also shifted to home-backed loans with cheaper interest rates from credit-backed loans.

The debt could sour when affordability of the borrower and home value falls. The borrower could end up losing his or her home and banks could be saddled with bigger risks to bad loans.

By Kim Hyo-sung

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