Expansion of DSR Personal Loan Regulations... Full Implementation in July 2023 (Comprehensive Report 2)

Introduction of 40-Year Ultra-Long-Term Mortgage for Cheongnyeoncheung (Youth)

[Image source=Yonhap News]

[Asia Economy Reporters Kwangho Lee, Sehee Jang] The government plans to reduce the household debt growth rate next year to the pre-COVID-19 level of around 4%. To achieve this, the Debt Service Ratio (DSR) will be gradually applied on a borrower basis and fully implemented starting July 2023. However, for the youth, a 40-year ultra-long-term mortgage will be introduced to ease the burden of principal and interest repayments.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated on the 29th at the Korea Eximbank in Yeouido, Seoul, during the "Emergency Economic Central Countermeasures Headquarters Meeting and Innovation Growth Strategy Meeting," "The household debt issue is directly linked to the livelihood of ordinary citizens and could also trigger risks in the financial system."

The household debt growth rate steadily declined from 11.6% in 2016 to 4.1% in 2019. However, it rose again to 7.9% last year due to overlapping real estate demand and speculative borrowing. In particular, self-employed individuals who faced a crisis last year borrowed 118.6 trillion won from banks alone, doubling compared to the previous year. The government plans to reduce the household debt growth rate to 5-6% this year and to around 4% next year.

Deputy Prime Minister Hong said, "As a result of consistent management, the household debt growth trend showed a downward stabilization, but it inevitably expanded again during the COVID-19 crisis response last year."

The government's decision to gradually expand DSR regulations aims to curb the total volume of loans. DSR is an indicator that calculates the burden of principal and interest repayments on all loans of a borrower. Currently, banks regulate DSR by maintaining an average of 40%. There are cases where borrowers take loans exceeding a 40% DSR, and the government intends to prevent this.

However, immediate full implementation of borrower-based DSR would cause significant shocks to the real estate and loan markets. The borrower-based DSR 40% applies to those who receive new loans from banks secured by homes priced over 900 million won in speculative or overheated speculation zones or whose total credit loans exceed 100 million won with an annual income over 80 million won. This group accounts for about 10% of all borrowers. The government plans to gradually increase this proportion to reach 100% by July 2023.

Meanwhile, to support low-income and young borrowers who may face difficulties due to tightened loan regulations, a 40-year ultra-long-term mortgage will be introduced to reduce the burden of principal and interest repayments. By extending the repayment period, the monthly repayment burden will be lowered. Especially for youth loans, the government plans to minimize difficulties by reflecting the potential for future income growth.

Additionally, to eradicate real estate speculation, starting next month, the government will introduce Loan-to-Value (LTV) and DSR regulations on non-residential secured loans such as land and officetels.