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Structural Weakness of Debt Held by Senior Householders

Jiseob Kim 2015/11/18
■ Korea's senior householders have weak repayment capacity but large amounts of debt, compared to those in major countries, largely due to structural factors.

○ Senior householders rely less on stable income sources, like pensions, but hold large debts relative to their financial assets, indicating insufficient short-term repayment capacity.

○ With the recent macro-financial conditions inducing an increase in the debt of all age groups, people are postponing repayment until their 50s, implying a delay in debt repayment.

○ Changes in macro-financial conditions will likely become a heavy burden on repayment for the senior population who rely on unstable income sources and weak asset liquidity.

■ Therefore, measures for real estate securitization must be extended to enhance the senior population's asset liquidity while establishing amortization-type loans in the Korean mortgage markets so debt burdens will not be deferred to the twilight years.

○ Efforts are needed to transition the loan repayment structure from interest-only bullet loans to monthly amortization loans so households can pay off a considerable amount of interest and principal, using stable income generated by retirement age.

-Target-specific measures should be developed by offering long-term loans to younger households with less earnings in order to relieve their monthly burden of interest and principal repayment, and by revising the DTI ratio for the middle-aged and senior households to reflect newly assessed values of their income and financial assets after retirement.

○ By extending the reverse mortgage system which in turn increases the liquidity of senior households via their real estate assets, senior householders do not need to make additional borrowings and can start paying off their debt.

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