[Household Debt Measures] Gradual Expansion of DSR by Borrower... Loans Over 40% Not Allowed from July

Government Announces Household Debt Management Plan on April 29
DSR Applied by Bank to Shift to Borrower...Gradual Strengthening Focused on Repayment Ability
Expansion of Financial Support for Low-Income and Youth...40-Year Mortgage Allowed

Eun Sung-soo, Chairman of the Financial Services Commission.

[Asia Economy Reporter Oh Hyung-gil] Starting from July, individuals with mortgage loans on houses exceeding 600 million KRW in regulated areas or credit loans exceeding 100 million KRW will be subject to the Debt Service Ratio (DSR) regulation.

LTV and DSR regulations will also be fully introduced for non-housing secured loans such as land, officetels, and commercial properties. The government plans to gradually expand the DSR application from being applied by financial institutions such as banks to being applied on an individual basis by 2023.

On the 29th, the Financial Services Commission announced a household debt management plan containing these details. The core of this plan focuses on adjusting loans according to individuals' repayment ability (income). The goal is to reduce so-called "Yeongkkeul (borrowing to the limit)" loans or "Debt Investment (debt-financed investment)" where one person borrows from multiple financial institutions.

The government aims to manage the household debt growth rate to around 4%, the level before the COVID-19 pandemic, by next year. Last year, the household credit growth rate was 7.9%, which was inevitable due to the COVID-19 crisis response, so this year it will be adjusted to around 5-6%.

In the second half of the year, a countercyclical capital buffer for the household sector will be introduced in the banking sector. Banks will be required to accumulate additional capital at a rate of 0-2.5% within a maximum period of one year.

Also, starting January next year, financial institutions will be incentivized to manage household debt by differentiating deposit insurance premiums they pay within a range of up to about 10%, based on evaluations of household loan risk and growth rates. A risk management system will also be introduced for limit-type excess loans in the secondary financial sector.

Loans Should Be Taken According to Individual Repayment Ability... Income Assessment to Be Flexible

Household Debt Management Measures Gradual Introduction of Total Debt Service Ratio (DSR) Regulation (Source: Financial Services Commission)

The borrower-specific DSR regulation will expand its application targets in three stages. DSR refers to the ratio of the total principal and interest repayment amount of all financial debts to the borrower's income, calculated by dividing the annual total debt principal and interest repayment amount by the annual income.

Currently, since only the average (DSR 40%) by bank needs to be met, there have been cases where individual borrowers have taken loans with a DSR exceeding 40%.

The government will first apply the DSR regulation from July to borrowers with mortgage loans on houses exceeding 600 million KRW in regulated areas and credit loans exceeding 100 million KRW. From July next year, the second phase will include those with total loans exceeding 200 million KRW. Finally, by July 2023, it plans to apply the regulation to borrowers with loans exceeding 100 million KRW.

However, loans recognized as having repayment sources, such as jeonse deposit loans, installment savings secured loans, and insurance contract loans, as well as policy loans like low-income financial products and emergency loans for natural disaster areas, will be excluded. Small loans under 3 million KRW are also exempt.

Various methods will be introduced for income assessment, which is the basis for loans. In addition to verified income, data such as national pension and health insurance premium payment records will be recognized. The government plans to continuously improve income estimation methods using various related data such as sales, rental income, financial income, and new techniques.

From next month, the management system for non-bank sectors and non-housing secured loans will also be reorganized.

LTV limit regulations for land, officetels, commercial properties, etc., will be uniformly introduced across all financial sectors. The applicable limit is a maximum Loan-to-Value (LTV) ratio of 70%. For new non-housing secured loans in land transaction permission areas, an LTV of 40% will be applied, but exceptions will be made for real demand borrowers such as farmers, fishermen, and agricultural workers.

The government plans to expand customized financial support to ensure that low-income and young people are not disadvantaged by the strengthened household loan regulations.

For young people with high future income growth potential, the "future income recognition standard" will be used when calculating DSR.

Additionally, a 40-year maturity policy mortgage loan will be introduced for young people under 39 years old and newlyweds to reduce the burden of principal and interest repayments. A plan to link "housing supply - ultra-long-term mortgage" will also be promoted so that young people can purchase homes without a large lump-sum burden.

Conceptual Diagram of Household Debt Management Measures (Source: Financial Services Commission)

This measure excludes the increase of LTV and DTI for actual housing demanders. The government plans to promptly announce related matters after collecting opinions and consulting with relevant agencies.

To prevent confusion caused by changes in the loan system, the government will operate an early settlement support team to respond to inquiries by industry and provide prompt authoritative interpretations.