[Song Seungseop's Financial Light] 10·26 Household Debt Measures... How Will My Loan Change?

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[Asia Economy Reporter Song Seung-seop] On the 26th, the government and financial authorities announced a new household debt policy. It is the ‘Strengthened Household Debt Management Plan.’ The goal is to proactively manage the increased risks caused by rising debt. There are three main tasks and detailed policies accordingly. We will highlight the core contents of the somewhat difficult and complex loan regulations.

1. What is borrower-level ‘DSR’?

The core of this debt policy is the borrower-level Debt Service Ratio (DSR) regulation. DSR refers to the ratio of all principal and interest payments made in one year to the annual income. For example, if a person with an income of 100 million KRW is subject to a 50% DSR regulation, it means that the total principal and interest payments in one year cannot exceed 50 million KRW. The ‘borrower-level DSR’ applies the DSR, which banks previously averaged, to each individual.

2. ‘Borrower-level DSR’ regulation applies if total loan amount exceeds 200 million KRW

From next year, related regulations will become stricter. Currently, in regulated areas, when purchasing a house over 600 million KRW with a mortgage loan or taking out a credit loan over 100 million KRW, a 40% DSR applies. This means the sum of principal and interest payments cannot exceed 40% of income.

However, starting January, one more condition will be added. If the total loan amount exceeds 200 million KRW, the borrower-level DSR regulation will apply. This means that even if you buy a house in a non-regulated area or take a credit loan under 100 million KRW, if the total loan amount exceeds 200 million KRW, you will be subject to regulation. This was originally scheduled to be implemented in July 2022 but has been moved forward.

From July of the same year, the regulation will apply if the total loan amount exceeds 100 million KRW. This was initially planned for July 2023 but has been advanced. However, conditions such as purchasing apartments over 600 million KRW in regulated areas or executing credit loans over 100 million KRW will be abolished.

3. 50% borrower-level DSR for secondary financial institutions

The amount of money that can be borrowed from secondary financial institutions will decrease. Unlike commercial banks, the borrower-level DSR was relatively generous at 60%. Even with the same income, more money could be borrowed from secondary financial institutions. However, this ratio will be lowered to 50%. Even if not subject to borrower-level DSR regulation, the average DSR by financial sector will be adjusted, so the possible loan amount is likely to decrease.

4. ‘Card loans’ included in loan regulations

Card loans will also be included in the borrower-level DSR regulation. If you have taken out a card loan, the possible loan amount for mortgage or credit loans may be reduced. Card loans have been excluded from DSR regulations as they are used by vulnerable groups. However, as the scale of card loans has rapidly increased and the risk of multiple debtors has also grown, they have been newly included.

5. ‘Average maturity’ applied when calculating DSR

Financial Services Commission Chairman Ko Seung-beom announced measures to strengthen household debt management on the 26th at the Government Seoul Office in Jongno-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

When calculating DSR, loan maturities previously applied uniformly as the maximum maturity will now be applied as the average maturity by product. For credit loans, the maturity was generally set at 7 years but will be shortened to 5 years. This increases the principal and interest payments made in one year, so if subject to DSR regulation, the possible loan amount will decrease. The same applies to non-mortgage loans, which will be lowered from 10 years to 8 years.

Ko Seung-beom, Chairman of the Financial Services Commission, emphasized, “We will faithfully implement the announced measures so that next year’s household debt growth rate stabilizes at around 4-5%, close to the nominal GDP growth rate, which reflects the real economy’s growth speed.”