[Yoon Administration Economy] Drastic Changes in Loan Regulations... How Will My Interest Rate and Limit Change?

New Loan Regulations Principally Implemented in Q3
If Loan Amount Not Received, LTV 80% Rule Applies
Future Income Recognition Requires Meeting Maturity, No-Homeowner Conditions
50-Year Mortgage Limited to Age 34 or Newlyweds Within 7 Years

[Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] On the 16th, the Financial Services Commission announced the 'New Government Household Loan Management Direction' and the 'Step-by-Step Regulatory Normalization Plan.' LTV and DSR regulations will be eased, and 50-year maturity policy mortgages and Safe Conversion Loans will be introduced. The changes in the system have been summarized in a Q&A format.

Q. Is there no problem with household debt soundness despite this regulatory normalization?

A. Efforts to ensure a soft landing of household debt will continue. This plan is a process of gradually normalizing excessive regulations that were urgently introduced within the scope of maintaining the basic principles for household loan soundness. It is also a measure to remove institutional constraints related to loans so that market functions can be normalized, allowing borrowers and lending institutions to make reasonable decisions on home purchases and loans under their own judgment and responsibility. Financial companies must thoroughly review repayment ability according to their own risk management standards and handle loans while complying with the suitability principle. Borrowers also need to make loan-related decisions based on repayment ability and housing price outlook, aiming for stable housing rather than excessive profit-seeking.

Q. What is the scope of ‘first-time homebuyers’?

A. It refers to those whose entire household members have never owned a home in the past. Those who previously owned a home but disposed of it and are currently non-homeowners are not considered first-time homebuyers and thus are not eligible for LTV relaxation. However, the current LTV preferential treatment for low-income and genuine demand borrowers who are non-homeowners can still be utilized.

Q. When will the 80% LTV for first-time buyers be applied?

A. The loan regulation normalization plan will be implemented after revising supervisory regulations for five financial sectors including banks. The new regulations will generally apply to new loan applications after the implementation date (third quarter this year), but some exceptions exist to protect borrowers. The 80% LTV rule applies even if the loan was applied for before the regulation change but has not yet been executed. For example, if a loan was first applied for in July but the loan amount is disbursed after the regulation implementation date, the eased regulation applies. Also, if a balance loan is taken after the implementation date based on a pre-owned sale right acquired before the regulation change, it is considered a first-time home purchase.

Q. Does this improvement mean that financial companies will uniformly provide loans up to 80% LTV to first-time homebuyers?

A. The 80% LTV is the maximum loan limit under financial sector supervisory regulations. Financial companies may set their own maximum allowable LTV ratios by region and housing type that are lower than 80% for soundness management. However, if a financial company’s own LTV is lower than 80%, mortgage insurance can be utilized. Financial companies can manage additional loss risks from LTV expansion through mortgage insurance, and borrowers can also receive additional loans via mortgage insurance if the financial company’s recognized LTV is low.

Q. Despite LTV normalization, won’t loans be restricted by DSR?

A. □ In the process of normalizing LTV regulations, the system will be reasonably improved so that the Debt Service Ratio (DSR) does not restrict loans for youth and others. The scope of future income recognition in DSR calculation will be expanded, and financial companies that have been conservative in recognizing future income will be encouraged to actively use future income recognition standards. Also, the recent trend of extending loan maturities helps ease DSR restrictions.

Q. Is there a separate age limit to apply for future income recognition in DSR?

A. Non-homeowner workers who intend to take out a mortgage loan (installment repayment) for home purchase with a maturity of 10 years or more can have future income recognized when calculating DSR. Borrowers who judge that recognizing future income is advantageous for DSR calculation can selectively use it. Using employment and labor statistics from Statistics Korea, borrowers aged 20-39 taking loans with maturities of 10 years or more benefit from using future income for loan limit expansion. Additionally, individual borrowers can receive future income recognition by submitting separate objective evidence.

Q. When will the three-stage borrower-level DSR be applied?

A. The three-stage system will be applied to new loan applications from the 1st of next month (regulation implementation date). If a financial company completes loan application registration through its system before July 1, the previous regulations apply. The previous regulations also apply to non-new loans (such as maturity extensions without increase). Even if a new loan application is made after July 1, if the decision necessary for the loan was made before that date, the previous regulations apply. A typical example is signing a real estate sales contract and paying a deposit by June 30. However, if pre-announced project sale rights are resold after July 1, the strengthened regulations apply.

Q. Are the 80% LTV for first-time buyers and expanded future income recognition in DSR calculation also applied to Bogeumjari Loan and Qualified Loans?

A. This plan will be equally applied to Bogeumjari Loan and Qualified Loans. The implementation date is scheduled for November, which differs from general financial institution mortgage loans. The 80% LTV relaxation for first-time buyers applies to both Bogeumjari Loan and Qualified Loans. However, the expanded future income recognition in DSR calculation applies only to Qualified Loans where DSR is applied. Bogeumjari Loan does not apply DSR.

Q. Is the 50-year maturity policy mortgage available to everyone?

A. To use the policy mortgage, one must basically qualify for Bogeumjari Loan or Qualified Loan support. The 50-year maturity policy mortgage will also have a separate age limit like the 40-year maturity product. The ultra-long-term mortgage is introduced not only to reduce repayment burden but also to support a housing ladder that matches income flow and repayment ability. Therefore, it is desirable to limit the target users to youth with a long income generation period. The 50-year maturity will be limited to those aged 34 or younger or newlyweds within 7 years.

Q. When will refinancing using the Safe Conversion Loan begin?

A. To minimize confusion in applications and delays in screening, the Safe Conversion Loan will be accepted and reviewed sequentially by dividing housing price ranges from lower prices upward. Sequential applications will be accepted from mid-September to early October, and the screening period will take at least 60 days from the application date. If scheduled, refinancing will begin from mid to late November. The goal is to complete loan execution for all applications within the year. However, screening may take longer due to concentrated applications and prolonged verification of eligibility. The applied interest rate will be a single rate discounted by 30 basis points from the Bogeumjari Loan rate at the time of implementation, regardless of application order. No additional preferential interest rates will be offered to ensure fairness and expedite screening.