By Kim Tae-jong

Local banks are on alert over soaring loan-to-value (LTV) ratios as a growing number of borrowers who have bought apartments in Seoul’s metropolitan areas see their ratios exceed the designated ceiling as a result of the falling values of their homes.

The LTV ratio is one of the main tools to curb household loans by restricting the maximum amount of money that homeowners can borrow in proportion to the value of their assets. It is currently capped at 60 percent in Seoul and the surrounding areas.

According to industry sources, there are about 120,000 households who bought new apartments in five new towns in Seoul’s metropolitan area on mortgages but residents have seen a drop in the price of their property.

Most of them now face pressure to repay the amount of debt that exceeds the LTV limit due to the drop in value.

The sluggish property market it has become a threat to both lenders and borrowers.

About 80,000 families moved to the new towns ― Pangyo, Dongtan, Gimpo, Gwanggyo and Paju ― between 2008 and last year and from this year to 2015, about 42,000 families will settle there.

Most people there bought their apartments on secured loans but their properties have seen about a 10 percent drop in price on average. That means many of them have to immediately repay the portion of the loan that exceeds the lending limit.

Consequently, banks’ financial health is also threatened as the LTV ratio will increase default rates.

According to the Bank of Korea, mortgages extended by local banks reached 223.8 trillion won as of the end of May, accounting for 27.2 percent of total loans.

The amount of loans that exceed the LTV ratio came to 44 trillion won as of end-March, about 14 percent of the total mortgages.

To tackle the situation, the nation’s financial authorities said last week that they are seeking to ease households’ repayment burden of such loans by having banks convert maturing mortgages exceeding the LTV ratio into home-backed loans.