[Household Debt Measures] From July, Loan Limits Reduced for Mortgage Loans on 600 Million KRW-Class Homes in Regulated Areas

From July, DSR 40% Applied to Mortgage Loans Over 600 Million KRW in Regulated Areas
Approximately 83.5% of Seoul Apartments Expected to Be Affected

[Asia Economy Reporter Park Sun-mi] Mr. A, an office worker with an annual income of 50 million KRW who is currently using a 50 million KRW unsecured loan (overdraft) at an annual interest rate of 3%, plans to take out a mortgage loan with an interest rate of 2.7% and a 20-year equal principal and interest repayment method to purchase an apartment priced at around 600 million KRW in a regulated area. Previously, he could borrow up to 240 million KRW through a mortgage loan, but due to the strengthened household loan management measures, from July, the DSR 40% regulation will be applied, lowering the maximum loan limit to 178 million KRW. Additionally, the maturity of the existing unsecured loan has been shortened from 10 years to 7 years, increasing the principal and interest repayment burden from 6.5 million KRW per year to 8.64 million KRW.

Starting in July, the DSR 40% regulation will be applied to mortgage loans secured by houses priced over 600 million KRW in all regulated areas, as well as unsecured loans exceeding 100 million KRW per borrower.

According to the household loan management plan announced by the Financial Services Commission on the 29th, from July, borrowers purchasing homes priced over 600 million KRW in regulated areas will be subject to the DSR 40% regulation when obtaining bank loans. The DSR regulation will also apply to unsecured loans exceeding 100 million KRW per borrower. This means that mortgage loan borrowers with collateral corresponding to about 83.5% of apartments in Seoul and about 33.4% of apartments in Gyeonggi Province will be subject to borrower-level DSR regulations.

DSR (Debt Service Ratio) is the ratio of the total annual principal and interest payments of all household loans to the borrower's annual income. It is an indicator used during loan screening to calculate the repayment burden of all loans held by the borrower. It reflects the repayment burden of all financial sector loans, including mortgage loans, unsecured loans, and card loans. The application of borrower-level DSR means that borrowers will be allowed to borrow only as much as they can repay based on their income.

Until now, the DSR 40% regulation was applied only when handling mortgage loans secured by houses priced over 900 million KRW in speculative and overheated districts, and only if the borrower’s annual income exceeded 80 million KRW and total unsecured loans exceeded 100 million KRW. Since the regulation was averaged at 40% per bank, some borrowers were able to borrow beyond a 40% DSR individually.

The government and financial authorities plan to gradually expand the scope of borrower-level DSR regulation. In July next year, the borrower-level DSR regulation will apply to mortgage loans on houses priced over 600 million KRW and unsecured loans exceeding 200 million KRW, as well as total loans exceeding 200 million KRW. It is expected that about 243,000 borrowers (12.3% of all borrowers) will be affected. Furthermore, in July 2023, the borrower-level DSR regulation will expand to loans exceeding 100 million KRW in total loan amount, affecting about 5.68 million borrowers, or 28.8% of all borrowers.

However, borrower-level DSR will be exempted at the time of loan application for cases where repayment sources other than income are recognized, such as jeonse deposit loans, savings/certificate of deposit secured loans, insurance contract loans, or for policy-driven needs such as low-income financial products, government/municipal agreement loans, and emergency loans for natural disaster areas.

System Improvement to Reflect Actual Maturity as Much as Possible When Calculating DSR

The financial authorities plan to improve the system so that actual maturities are reflected as much as possible when calculating DSR starting this July. Currently, some mortgage loans (principal and interest repayment) apply actual maturities, but unsecured loans uniformly apply a 10-year maturity (especially, revolving credit lines renewed annually are also conventionally calculated with a 10-year maturity). The uniform 10-year maturity for unsecured loan DSR calculation will be reduced to 7 years from July and further lowered to 5 years in July next year. As the maturity of unsecured loans shortens, the borrower's principal and interest repayment burden may increase.

However, to prevent difficulties in loan screening for borrowers whose income is hard to verify when borrower-level DSR is fully implemented, diverse and flexible income recognition methods will be expanded and operated. In addition to documented income such as income tax payment records, recognized income will be widely utilized through national pension and health insurance premium payment records. Continuous improvements will also be pursued using various related data such as sales, rental income, financial income, and new techniques for income estimation.

For example, by operating various income recognition methods, a retiree receiving a monthly pension of 500,000 KRW who applies the DSR regulation and takes out an unsecured loan with a 10-year maturity and 3% interest rate without other loans such as mortgage loans will be recognized for pension income of 6 million KRW annually and be able to borrow up to 18 million KRW in unsecured loans. A business owner who is temporarily closed but pays 100,000 KRW monthly in health insurance premiums can use the health insurance premium payment amount as recognized income and borrow about 100 million KRW in unsecured loans. A full-time housewife who uses credit cards amounting to 15 million KRW annually can calculate annual income using credit card usage and borrow up to 92 million KRW in unsecured loans.