[Household Debt Measures Q&A] "Interim Payment Loans Exempt from DSR Regulations"

Financial Authorities "Reducing Speculative Demand to Support Youth and Genuine Buyers"

Eun Sung-soo, Chairman of the Financial Services Commission, is attending the 'Emergency Economic Central Countermeasures Headquarters Meeting' held at the Korea Export-Import Bank in Yeouido, Seoul, on the 29th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Oh Hyung-gil] The government has decided to expand the application of the Debt Service Ratio (DSR), which was previously applied by financial company, to the borrower unit starting this July, and to fully implement it by July 2023.

A regulatory framework for non-housing secured loans such as land, officetels, and commercial buildings will be established, and the Loan-to-Value (LTV) limit regulation, which is currently capped at 70%, will be uniformly applied across all financial sectors.

On the 29th, financial authorities explained that this household debt management plan will ensure loans are made within individuals' repayment capacity, thereby simultaneously enhancing the soundness of financial companies and curbing excessive borrowing by financial consumers.

Below is a Q&A regarding the Financial Services Commission’s household debt management plan.

- Young people and actual demanders have raised the need for regulatory adjustments to support home ownership. Does the household loan management plan go against market demands?

▶ While managing household debt within the total loan volume management target, we plan to increase financial support for actual demanders. We will shift the flow of funds in the household loan market from speculative demand through excessive financial borrowing to actual demand, and in consultation with related ministries, we will promptly prepare and announce a comprehensive support plan for actual demanders, including expanding LTV preferential benefits for low-income and actual demanders.

- What are the expected effects of applying borrower-unit DSR? How much will loan limits decrease with the expanded implementation of DSR?

▶ For actual demanders who borrow within their income range, the impact on loan limits will not be significant. However, speculative demand (such as gap investment) investing in real estate through excessive financial borrowing beyond income is expected to be relatively greatly affected. While LTV is a regulation to minimize financial companies’ losses by securing sufficient collateral, DSR protects borrowers by ensuring they borrow only as much as they can repay.

- Is strengthening borrower-unit DSR on top of the existing LTV regulation a redundant regulation?

▶ Compared to LTV regulation, repayment ability assessments have been relatively lax. There is a possibility of a balloon effect through unsecured loans, which are not subject to LTV regulation depending on economic conditions, and there are limits to blocking asset investment through excessive leverage without considering income. The DSR regulation ensures loans are made within repayment capacity, thereby simultaneously enhancing the soundness of financial companies and curbing excessive borrowing by financial consumers.

- Are group loans such as interim payment loans included in DSR calculations?

▶ Interim payment loans are excluded from the scope of application as it is customary for them to be refinanced through final payment loans in the future.

- Will the limit for overdraft accounts with actual maturity be reduced to 40% of income?

▶ The principle of loans being handled within repayment capacity applies not only to unsecured loans but to all loans. The limit for overdraft accounts with a one-year maturity may be restricted to within 40% of annual income. However, before the system is implemented, we plan to supplement it by encouraging multi-year unsecured loans with installment repayment conditions and adjusting contract maturities.

- Will farmers or small business owners who raise funds through household loans face increased difficulties?

▶ Most agricultural land secured loans for farmers are below an LTV of 70%, and the average loan amount is understood to be less than 100 million KRW, so the regulatory impact is expected to be minimal. To prevent unintended harm, we plan to establish simplified business loan handling procedures for farmers, fishermen, and small business owners.

- Will the non-housing secured loan regulation make it difficult for young people to obtain officetel-secured loans?

▶ The average LTV for officetel-secured household loans is 51.4%, so there will be little change in housing burden for actual demanders. However, acts such as purchasing multiple officetels with excessive leverage for speculative purposes will be restricted.

- How much does the loan limit increase when reflecting young people’s future income?

▶ The lower the age and the longer the loan maturity, the greater the increase in loan limit is expected. For example, a 24-year-old worker without a home earning 2.5 million KRW per month, taking out a 30-year maturity loan, would see the loan limit increase from 250 million KRW to 348.5 million KRW when applying the expected income growth rate (75.4%).

- What are the usage criteria for the 40-year ultra-long-term mortgage?

▶ This is not a new product but rather an expansion of contract maturity options for young people using existing products such as the 'Bogeumjari Loan' and 'Qualified Loan.'