[Exclusive] Pressing Apartment Leads to Commercial and Land Mortgage Loans... 35% Exceed DSR 100%

Apartment Loans Shift to Commercial and Land Loans
One-Third of Commercial and Land Secured Loans Exceed 100% DSR in New Loans
Loose Regulations Lead to Gap Investments and Concentration

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] As the government tightens regulations on mortgage loans for high-priced homes, wealthy individuals are flocking to commercial properties and land. With it becoming more difficult to invest in housing by borrowing excessively, those interested in real estate investment have turned to non-residential investments where loan regulations are more lenient. Unlike mortgage loans, it is easier to borrow even if the Debt Service Ratio (DSR) is high when purchasing commercial properties or land.

According to data submitted by the Financial Supervisory Service to Min Hyung-bae, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, about 3.2 trillion KRW in new non-residential secured loans with a DSR exceeding 100% were issued over the 10 months from September last year to July this year. This accounts for 35.2% of the total new non-residential secured loans amounting to approximately 9 trillion KRW (8.99 trillion KRW) during the same period. The average DSR was 119.2%, exceeding 100%. Looking specifically at commercial property loans, loans with a DSR over 100% amounted to 1.2 trillion KRW, with nearly half (45%) of these loans being granted despite the principal and interest repayment amount exceeding the borrower’s income.

The DSR is an indicator that represents the borrower’s repayment burden relative to their repayment ability, calculated by dividing the annual principal and interest repayment amount of all loans held by the borrower by their annual income. Simply put, individuals who purchased land or commercial properties in the past 10 months were able to obtain loans even when their principal and interest repayment ratio exceeded 100% of their income.

Currently, the Financial Supervisory Service manages average DSR targets by bank (40% for commercial banks, 80% for regional and specialized banks). When borrowing against homes priced over 900 million KRW in speculative or overheated speculation zones, a DSR regulation of 40% applies, but there are no separate regulations for non-residential secured loans.

The problem is that with the prolonged COVID-19 pandemic, income from commercial real estate such as shops and offices is not as strong as before. Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Due to the COVID-19 pandemic, lodging and food service industries have been hit hard, and if the vacancy rate rises and income is not recovered, it could cause shocks to the financial market." Representative Min argued, "Non-residential secured loans could also become a hotbed for gap investment in commercial properties, so regulatory measures are necessary."