[Inside Chodong] Increasingly Complex and Difficult Real Estate and Loan Regulations

Consumers Confused by Constantly Changing and Complicated Policies

[Asia Economy Reporter Park Sun-mi] There are several commonalities in Korea's real estate and loan regulations, which continue to show gaps despite multiple layers of packaging. One prominent commonality is that it is not at all awkward to describe them as "complex." Another is that the content keeps changing, making it difficult to predict even a short distance ahead, and yet no one can confidently say that these measures are effectively producing results.

As we pass the first half of 2021 and stand at the starting point of July, many people are still moving forward with worries about housing and money. It would be great if policies that could alleviate these concerns were introduced and proved effective, but unfortunately, what they face are only the complicated real estate regulations followed by difficult loan regulations.

In particular, with the household debt management measures, including the expansion of the borrower-level Debt Service Ratio (DSR), taking effect from this day, internet financial communities are flooded with questions about loan eligibility, limits, and methods. Due to the complexity of the content, individual responses have become difficult, and it has turned into a challenging issue that requires consulting financial experts who understand the details to come up with answers.

Previously, it was sufficient to consider only the Loan-to-Value ratio (LTV) and Debt-to-Income ratio (DTI) when taking out a loan, but now with the expansion to include DSR and the detailed division of conditions and situations, it has become more difficult to estimate the loanable amount and create scenarios for purchasing real estate with appropriate leverage.

To summarize simply:

From this day forward, in regulated areas such as Seoul, when taking out a mortgage loan on a house priced over 600 million KRW or a credit loan over 100 million KRW, a DSR of 40%, which represents the ratio of total financial loan principal and interest repayments to income, will be applied.

From July next year, the DSR regulation will apply when the total loan amount exceeds 200 million KRW, and from July 2023, it will apply when the loan amount is over 100 million KRW. Additionally, the LTV preferential rate applied when a non-homeowner takes out a mortgage loan to buy a house will increase by up to 20 percentage points, 10 percentage points more than before. For non-homeowners, the house price criteria for receiving LTV preferential benefits will be relaxed from 600 million KRW to 900 million KRW (in adjusted target areas, from 500 million KRW to 800 million KRW), and the income criteria will be expanded from a combined couple income of 80 million KRW or less to 90 million KRW or less (for first-time homebuyers, from 90 million KRW to 100 million KRW). Young people and newlyweds can use policy mortgages with a 40-year maturity.

The complexity and difficulty of the content stem largely from the need to strengthen loan regulations to control the rapid increase in household debt while also considering some relaxation of loan regulations to ensure housing stability for non-homeowners and actual demanders. Additionally, with the presidential election next year, political calculations must consider public opinion, which is sensitive to real estate and loans.

As household loans surged amid the prolonged COVID-19 pandemic destabilizing the Korean economy, concerns grew, and the weight shifted toward further regulating the real estate market and loans. However, when public opinion worsened, attention swung back to the view that "actual demanders should be given opportunities to own homes even if it means taking on debt," creating a confusing situation where loan regulations are expected to be eased amid tightening.

Because real estate and loan regulations have repeatedly "ping-ponged" between strengthening and easing without consistency, the end result is a complicated formula, and citizens find it difficult to even estimate how much loan they can receive without studying. It is regrettable that, pressed for time and pushed by public opinion, hastily prepared measures have led to increasingly difficult real estate and loan regulations, whereas it would have been better if well-planned, meticulous policies that did not require mid-course corrections had been introduced from the start.