[Household Debt Measures] Banks Say "DSR 40% Regulation Will Hit Low-Income Groups Harder"

[Asia Economy Reporters Kiho Sung and Hyojin Kim] The banking sector anticipates that it will become more difficult for low-income households to obtain apartment mortgage loans due to the government's and financial authorities' household debt management measures. As the total debt service ratio (DSR) of 40% is gradually applied and DSR replaces the debt-to-income ratio (DTI), 'income' will become a crucial factor when handling mortgage loans, leading to a significant reduction in loan limits, especially for low-income borrowers. However, the introduction of ultra-long-term mortgages, which partially raised loan limits for young people and newlyweds, was positively evaluated.

The Financial Services Commission announced that on the morning of the 29th, at the Export-Import Bank headquarters in Yeouido, Seoul, the Emergency Economic Central Countermeasures Headquarters meeting and Innovation Growth Strategy meeting, chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki, approved the household debt management plan jointly prepared by related agencies.

Until now, financial institutions have managed to maintain an average total debt service ratio (DSR) level of 40% at the institution level, except for specific borrowers. The new plan is to apply this 40% DSR limit to every individual borrower, aiming to reduce the household debt growth rate next year to the pre-COVID-19 level of around 4%.

The core of this household debt management plan is to expand the application of the 40% DSR limit to individual borrowers in three phases by July 2023. The policy mandates that loans be granted within the 40% DSR limit.

The banking sector evaluated this measure as a policy focused on controlling the household debt growth rate. A banking official stated, "The expansion of DSR application was anticipated since the household debt measures announced last November. However, there are concerns that the loan-to-value ratio (LTV) applied to non-housing collateral loans will reduce the collateral value of all real estate." It is especially expected that low-income borrowers will find it difficult to take out 'younggeul' (borrowing to the limit, literally 'borrowing to the soul') loans.

Concerns about reverse discrimination due to the expansion of DSR have also been raised. As loan limits for mortgage loans in regulated areas and credit loans are all reduced, the amount of loans available will shrink significantly for low-income borrowers rather than high-income borrowers, causing a greater impact on the former.

However, the introduction of ultra-long-term mortgages was positively evaluated. Another banking official said, "By recognizing future income considering the life-cycle income, the DSR calculation will somewhat ease the financial burden on the younger generation. However, regarding benefits for low-income borrowers, the combined annual income limit of 80 million KRW for couples is based on past standards, so there is a need to raise the low-income criteria slightly."