Korea Aims to Reduce Household Debt

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Typical households in Korea at least have the following debts – mortgage loan, overdraft line of credit card, and student loan for university fee. The average household debt in Korea has been rising since 2003. The ratio of disposable income to household debt reached 163.8 % in 2012 which is 30% bigger than that of average OECD countries. And it is the Korean government’s aim to lessen financial burden. The Financial Services Commission along with the Ministry of Strategy and Finance came up with genuine policies which will effectively achieve this goal.

#1 Tax Deduction for Long-term Investment Fund
The policy was announced on March 5th 2014. In most of the cases, long-term fund is to prepare for one’s retirement rather than simple investment. Considering this fact, the FSC came up with new policy to give tax deduction for long-term investment fund. Workers who earn less than fifty million won per year are eligible to get up to 40% of tax deduction on their payment within six million won. About 30 asset management companies in Korea launched this new fund product from the 17th of this month after the Financial Supervisory Service’s approval. This policy especially captures attention of the middle class or the middle-aged who are seeking for retirement finance.
* Tax Deduction on Long-term Investment Fund
– For whom: Workers who earn less than fifty million won per year
– On what: Long-term investment fund
– How much? Up to 40% on their payment within six million won

#2 Tax Deductions on Long-term Mortgage Loan
Household debt is thought to be Korea’s Achilles heels in the financial industry. Household debt surpassed 1,000 trillion won in February 2014. Household debt includes loans from backs and other financial institutions as well as credit card debt. What takes up the majority amount of debts? According to a statistics, around 53 percent of household debt in Korea is housing-related. In other words, the highest percentage of debt comes from housing, house rent, purchase or lease. The FSC announced that it will expand financial services by enlarging the amount of money covered by tax-deduction on mortgage loan. Ordinary people will get about 10 to 30 years long-term mortgage loan when purchasing house. Before the revision, People with fixed rate mortgage loan over 15 years or more could get tax deduction as much as up to 15 million won. Now anyone who borrowed long-term mortgage loan over 15 years or more will get 18 million won of maximum tax deduction.
* Tax Deduction on Mortgage Loan
– For whom: Anyone with loan-term mortgage loan
– On what: Fixed rate mortgage loan over 15 years or more
– How much: Up to 18 million won (increased from 15 million won)

#3 Low Rate Loans for Business Owners
Business owners consist 31.3 percent of working population in Korea. The FSC had been paying attention to such number since 60% of them are likely to change the company names due to financial problems. Most of business owners start up business with limited amount of capital. Hence, they are likely to borrow loans when they plan to expand business. Financial sources for those business owners are limited; they mostly ask for money from friends and families since loans from bank are considered to be expensive. This is why 2 out of 3 business owners change shop names instead of extending business to make more money. The FSC extended its existing supports for small independent businessmen. It used to be like this: a business owner borrows loan with as high as 20% interest rate to start up business, or he asks his families and friends for money. The FSC will lower the interest rates for small business owners. They will get about 10 percent lower interest rate loans. Business owners who borrow about 15~20% interest per year will now can borrow loans with lower interest rates of 8~12%.
* Lower Interests for Business Owners
– For whom: Small business owners who want to start up or expand business
– On what: High interest loans (15~20%)
– How much: Lower interest rates of 8~12% per year

Tax exemptions and deductions are the most effective financial supports to ease household burden. The FSC has introduced number of measures that will bring up structural improvements in household assets. There were concerns that financial services need to go further from solving existing inconveniences to preventing future problems. The explicitly aim to support business owners and households, the two financially vulnerable groups which are thought to have the most pressure. These new policies are expected to relieve financial problem.

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