Didimdol Loan Balance to Exceed 100 Trillion Won Next Year... Interest Subsidy Costs Set to Snowball

The outstanding balance of Didimdol loans, which are used by lower-income households to purchase homes, is expected to exceed 100 trillion won next year. Didimdol loans are a major policy loan program. As recently as 2021, five years ago, their outstanding balance was less than 30 trillion won, but it has been rising rapidly since then.

The rapid growth in lending is a problem in itself, but so is the equally rapid increase in the amount the government will eventually have to reimburse banks. Some Didimdol loans are issued directly by the Housing and Urban Fund, but most are made using banks' own funds, with the government using its budget to cover the difference between market mortgage rates and policy loan rates. After a series of benchmark rate hikes in the second half of this year, rates are likely to continue rising next year as well, raising the possibility that the amount of these reimbursements will exceed initial projections.

Data submitted by the Ministry of Land, Infrastructure and Transport to the National Assembly Budget Office show that the outstanding balance of Didimdol loans stood at 90.7959 trillion won as of the end of July this year. The ministry projected that it would rise to 106.849 trillion won next year. That would be nearly four times the 28.8768 trillion won recorded in 2021. The average annual growth rate over this period would be about 24%, far exceeding the growth rates for all mortgage loans (about 3.8%) and household debt (about 2.2%) over the same period.

Demand for Didimdol loans has remained steady over the years, thanks to their low interest rates and exemption from the debt service ratio (DSR) requirement, among other factors. The gap between their rates and market rates widened as rate hikes gathered pace in 2022, and lending grew rapidly from 2024 with the introduction of a special program for families with newborns. Although the program is intended for lower-income households without homes, it also has adverse effects. It risks working against policies to curb household debt, while the artificial injection of liquidity into the lower- and mid-priced housing market distorts prices and reinforces their downward rigidity.

The sharp increase in interest subsidy payments is another concern. Under an interest subsidy arrangement, the government uses its budget to reimburse banks for the difference between the rate a borrower would pay on a standard mortgage and the Didimdol rate. The arrangement has expanded rapidly in recent years amid concerns over a shortage of surplus funds in the Housing and Urban Fund. For example, if the fund used 1 billion won to provide loans of 100 million won each, it could serve 10 borrowers. With interest subsidies, if the rate difference were 2 percentage points, the same amount could support 50 times as many borrowers, or 500.

Information on Didimdol loans and other products posted outside a bank in Seoul. Yonhap News.

However, while loans issued directly from the fund can be repaid after a certain period, interest subsidies are spent on reimbursing banks and are therefore nonrecoverable expenditures. The interest subsidy budget stood at around 498.2 billion won in 2022, rose to 1.972 trillion won this year, and was set at 2.072 trillion won in next year's budget proposal. These figures include interest subsidies for the Buteummok jeonse loan program.

The interest subsidy arrangement is vulnerable during periods of rising interest rates because the gap between market rates and policy loan rates widens. The subsidy is determined each time based on the interest rates in effect when payments are made to banks. In estimating next year's budget for the Didimdol loan interest subsidy program, the Ministry of Land, Infrastructure and Transport used an average rate difference of 1.37 percentage points.

The rate difference varies depending on each borrower's circumstances. But mortgage rates have recently risen, and the gap is already around 1.5 percentage points on average and more than 2.0 percentage points for borrowers receiving the lowest or preferential rates. The Bank of Korea may also continue raising rates next year, taking inflation and economic growth into account. Given these factors, the assumptions used by the government appear conservative.

There is precedent for interest subsidy spending surging during a period of rising rates: it happened in 2023. After the low-rate environment of the COVID-19 pandemic ended, the benchmark rate was raised by 2.25 percentage points in 2022 alone. When interest subsidy spending surged beyond expectations the following year, in 2023, the Ministry of Land, Infrastructure and Transport revised its fund management plan and increased the budget for the interest subsidy program by 243.9 billion won.

Hyun Seorin, a budget analyst at the National Assembly Budget Office, said, "Although funding for interest subsidy programs cannot be recovered and their medium- to long-term fiscal burden is not readily apparent, the scale of these programs has increased sharply in recent years." She added, "The Ministry of Land, Infrastructure and Transport needs to estimate the medium- to long-term fiscal costs of expanding interest subsidies and establish appropriate allocation criteria between direct lending and interest subsidies to manage the medium- to long-term fiscal burden."

This content was produced with the assistance of AI translation services.