What to Do About Balance Loans... Patchwork Measures Only Increase Market Confusion

Uncertainty Over Application of New DSR Rules to Buyers' Final Loan Payments
Retroactive Application Unlikely... Clear Detailed Guidelines Delayed for 2 Weeks
Patchwork Measures Criticized for "Fueling Market Confusion"

"If the DSR 40% regulation is suddenly applied, I feel like I have to give up my dream of owning a home and rent it out instead. I am so frustrated that I can't sleep. (Borrower A, who is about to take out a balance loan)"

"I feel like this policy is like 'nose ring if hung on the nose, earring if hung on the ear.' There are floods of inquiries about balance loans, but without clear standards, we are unable to provide guidance. (Bank teller B at a commercial bank)"

The aftermath of the ‘April 29 Household Debt Measures,’ which focus on strengthening the Debt Service Ratio (DSR), is intense. In particular, whether the DSR 40% regulation applies to balance loans for apartments already purchased has become a hot issue. Looking at precedents, it is likely that retroactive application will not be enforced, but there is growing criticism that the financial authorities have caused confusion by issuing ‘regulations without clear detailed guidelines.’

According to the financial sector on the 10th, borrowers who need to use balance loans are in severe confusion ahead of the implementation of the new DSR regulation scheduled for July. This is because the financial authorities did not clearly state whether the DSR 40% regulation would apply to balance loans for pre-sale buyers when announcing the April 29 Household Debt Measures.

DSR refers to the ratio of the borrower's annual principal and interest repayment amount on financial debts to their annual income. It reflects the repayment burden of all loans, including mortgage loans and other loans such as credit loans, and is called the ‘ultimate loan regulation.’

For borrowers about to move in, if the DSR regulation is applied, the loan limit will be significantly reduced, inevitably disrupting their funding plans. For example, if an apartment located in a regulated area is worth 700 million KRW at the time of move-in, a loan of up to 280 million KRW was originally possible by applying an LTV of 40%. However, if the DSR regulation is applied, a borrower with an annual income of 50 million KRW and a 50 million KRW overdraft limit will see their loan limit reduced to 230 million KRW starting in July.

A banking official said, "If the DSR 40% regulation, which covers all loans, is applied, there is virtually no way to cover the shortfall in mortgage loans," expressing concern that "borrowers who are about to move in within two months will be very anxious about how to handle their balance loans."

Patchwork Household Debt Measures... Severe Fatigue Among Banks and Borrowers

This confusion is not the first time. During the June 17 real estate measures last year, when the LTV in areas such as Geomdan and Songdo in Incheon was strengthened from the existing 70% to 40-50%, the same standards were applied to borrowers who had purchased apartments before the announcement, causing controversy. As borrowers unable to receive balance loans surged and market confusion grew, an exception clause was eventually created to maintain the LTV at 70% for pre-sale buyers as a ‘patchwork remedy.’

Although not yet finalized, the financial authorities are reportedly considering not applying the strengthened DSR regulation to balance loans for apartments subscribed or purchased before the regulation takes effect to resolve market confusion this time as well. A financial authority official said, "We are well aware of the confusion caused by the balance loan issue," adding, "We are currently organizing inquiries coming from frontline counters by case."

However, despite having experienced similar cases in the past, there is strong criticism that the announcement of regulations without detailed guidelines has fueled market confusion. Critical posts condemning the financial authorities are pouring in, especially on real estate communities.

A financial sector official pointed out, "The household debt measures were delayed by more than a month compared to the original expectation, but it is puzzling that the detailed guidelines are still unclear," adding, "The approach of throwing out regulations first and dealing with controversies later is a patchwork response that leaves both banks and borrowers exhausted."