[Yoon Administration Economy] Gradual Normalization of Real Estate Loan Regulations, Easing of First-Time Homebuyer LTV to 80%

[Asia Economy Reporter Song Hwajeong] Real estate loan regulations will be gradually normalized. The loan-to-value ratio (LTV) cap for first-time homebuyers will be eased to 80%, and a long-term, fixed-rate refinancing program called the Safe Conversion Loan will be supplied. The limit for emergency living expense mortgage loans will also be expanded.

On the 16th, the Financial Services Commission announced the "Household Loan Regulation Normalization Plan," which includes the new government's household loan management direction and phased normalization of loan regulations to support the housing ladder, as part of the "New Government Economic Policy Direction."

The new government's household debt management direction was presented as ▲ stable management of household debt growth ▲ phased normalization of real estate loan regulations ▲ protection of vulnerable groups during the interest rate rise period.

To stably manage the increase in household debt, the policy is to prevent excessive household debt expansion beyond income levels by establishing the practice of borrowing only what can be repaid (DSR) and repaying in installments (installment repayment). To this end, the three-stage borrower-level total debt service ratio (DSR) is scheduled to be implemented as planned from next month. When the total loan amount exceeds 100 million KRW, new loans can be issued within the regulated DSR ratio (40% for banks, 50% for non-banks) for regulated borrowers. To protect low-income and vulnerable groups, some loans such as jeonse loans, policy mortgages like the Bogeumjari Loan, moving and interim payment loans, microfinance products, and small credit loans under 3 million KRW are excluded from DSR calculation.

Real estate loan regulations will be normalized step by step.

First, for first-time homebuyers, an LTV cap of 80% will be applied regardless of the housing location or price. The total loan limit is capped at 600 million KRW (previously 400 million KRW), but expansion will be considered later depending on household debt and real estate market conditions. The Financial Services Commission plans to implement this through revisions to the Banking Supervision Regulations in the third quarter.

Along with this, the reflection of future income in DSR calculation will be expanded. The DSR for young people, whose repayment ability is underestimated when calculated based on current income despite high future income growth potential, will be improved. The calculation method for future income will be improved based on age-specific income data from the Statistics Korea employment and labor statistics to reflect actual income flow, and borrowers will be allowed to choose the most favorable maturity when calculating future income. Currently, maturity is limited to a maximum of 20 years, but going forward, borrowers can choose between 20 years (current maximum maturity) or the actual maturity that is more advantageous when calculating future income. Accordingly, the loan limits for age groups with high future income growth potential will increase from the current 38.1% and 12.0% for early 20s and early 30s, respectively, to 51.6% and 17.7%.

With the expanded implementation of borrower-level DSR, some loan regulations related to living expenses will also be supplemented to prevent excessive financial constraints on actual demand borrowers. First, the restriction on credit loans within annual income will be abolished. Currently, credit loan limits are restricted within annual income, but this will be removed, and excessive loans beyond income levels will be managed uniformly through borrower-level DSR. In addition, the scope of emergency living expense loans exempt from DSR application will be expanded. Currently, emergency living expense mortgage loans can be exempted from DSR application up to 100 million KRW with approval from the credit review committee of individual lending institutions, but this limit will be increased to 1.5 billion KRW. The Financial Services Commission plans to discuss with the financial sector to consider further easing for essential living expenses to prevent excessive financial constraints during the expanded DSR operation.

The Safe Conversion Loan will be promoted. Through securitization of mortgage-backed securities (MBS) by the Korea Housing Finance Corporation, variable-rate mortgage loans will be refinanced into long-term, fixed-rate policy mortgages with additional interest rate reductions. The government plans to supply 20 trillion KRW of Safe Conversion Loans this year and up to 20 trillion KRW next year. This year's support targets are variable-rate (including hybrid) mortgage loans from the first and second financial sectors, with a market price of 400 million KRW or less, combined couple income of 70 million KRW or less, a maximum loan limit of 250 million KRW, and a fixed interest rate up to 30 basis points (1bp=0.01%) lower than the Bogeumjari Loan rate at the time of implementation. Applications will be accepted in September.

The loan limit will be expanded by introducing a 50-year maturity mortgage. The maximum maturity of the Bogeumjari Loan and qualified loans will be extended from the current 40 years to 50 years. The 50-year maturity policy mortgage is available to those aged 34 or younger or newlyweds within 7 years. For newlyweds with a combined annual income of 30 million KRW, a Bogeumjari Loan debt-to-income ratio (DTI) of 60%, and currently using a 50 million KRW credit loan (assuming 4.25% interest), choosing a 50-year maturity instead of 40 years for a 300 million KRW loan reduces the monthly principal and interest repayment burden by 90,000 KRW and increases the maximum loan amount by 20 million KRW.

The repayment burden for young people will also be eased by expanding the introduction of the graduated repayment method. The graduated repayment method means that the principal repaid is small at the beginning of the loan (with a higher interest portion) and gradually increases over time, causing the monthly principal and interest to increase. The graduated repayment method will be introduced for the 40-year maturity Bogeumjari Loan for young people and newlyweds, which is expected to reduce the repayment burden in the early stages of the loan when income is low.

In addition, the early repayment fee for Bogeumjari Loans and qualified loans will be reduced by 25%, from the current 1.2% (3-year sliding scale) to 0.9% (3-year sliding scale).