Painful transition stage from bullet-type to amortizing loans

This is a brief excerpt from the upcoming book.

The housing loan structure of Korea is currently in a transition stage from mainly a short- term bullet-type of loan, in which the principal repayment is not included in the monthly interest payments, to a longer-term amortizing loan structure. This has been one of the biggest changes to the entire housing debt structure in Korea in the past several years. This transition stage is not likely to be pain-free. Rather it is likely to include much turmoil and many excruciatingly difficult policy decisions. In addition, the transition stage from the 2010 to 2012 period is likely to witness higher than expected interest rates globally, a threat that could make this transition stage quite painful.

The real test is likely to be from the winter of 2010 to 2012, when for many mortgages the continued delays of principal repayment can no longer be postponed and some of the household loan borrowers in Korea who have switched from bullet-type to amortizing loans need to pay much higher interest payments, as they are required to pay both the interest and principal repayments.

A significant number of households in Korea switched from bullet-type of loans of three years or less to longer-term amortizing loans from 2004 and afterward. The switch involved a bait, which was that the households could delay principal repayment by two to three years at the start of the switch from the bullet-type to amortizing loans. During this period, the borrower would need to pay only the interest on the household mortgage but not the principal. The massive increase in the interest payments resulting from the interest-only payment on household loans to interest-plus-principal repayment is approaching Korea like a thief in the night, catching the country unaware.