[BOK Focus] "DSR Regulation Should Apply to Jeonse Loans Too"...Reason Proposed by Bank of Korea

The Bank of Korea has attracted market attention by explaining in its financial stability report for the second half of the year that it is necessary to apply the Debt Service Ratio (DSR) regulation to Jeonse loan funds as well. Recently, as the real estate market, including Jeonse prices, has stagnated due to high interest rates, the government has been easing loan regulations one after another to prevent a liquidity crisis. However, the Bank of Korea mentioned strengthening the DSR regulation on Jeonse loans, which was not introduced even during the period of rapid house price increases.

In the financial stability report released on the 22nd, the Bank of Korea explained, "Considering that Jeonse loans have been used as funds for some gap investments, acting as a factor in rising housing prices and increased housing market volatility, it is necessary to consider applying differentiated DSR regulations depending on the purpose of the loan." The explanatory materials further elaborated, "This refers to the option of partially applying DSR regulations to Jeonse loans."

Currently, Jeonse loans are not subject to DSR regulations. The DSR regulation limits the borrower's annual principal and interest repayment amount to a certain percentage of their annual income and serves as an indicator to determine whether the borrower has sufficient income capacity to repay the loan. However, Jeonse loans are excluded from the principal and interest calculation targets along with products such as financial products for low-income households and loans for moving expenses or interim payments. This is because applying DSR to Jeonse loans could reduce the loan limits for borrowers with many loans, potentially destabilizing their housing situation.

However, as the previous government saw not only land prices but also Jeonse prices continue to soar amid a booming real estate market, perceptions of Jeonse loans began to change gradually. According to the Bank of Korea, the balance of Jeonse loans has steadily increased since related statistics began in 2016 but recorded a negative figure for the first time last month due to the real estate market downturn.

During the period of rapid house price increases from 2020 to 2021, Jeonse loans surged by 2 to 3 trillion won or more each month. With low interest rates, Jeonse loans increased significantly, causing Jeonse prices in Seoul and other metropolitan areas to skyrocket. This led to an expansion of gap investments (purchasing homes with Jeonse loans), which further drove up already unstable land prices.

As a result, voices calling for stricter regulations on Jeonse loans have steadily emerged both inside and outside the government. On November 13, 2020, the Financial Services Commission, through its "Household Loan Management Plan including Credit Loans," stated, "Jeonse funds are temporary debts for housing, so they are currently excluded from DSR, but it is necessary to review in the long term whether this should change," igniting discussions on expanding regulations to stabilize house prices.

In particular, last year, Go Seung-beom, the chairman of the Financial Services Commission known as the "grim reaper of household debt," launched strong household debt measures, but the application of DSR to Jeonse loans was not implemented. At that time, Chairman Go said, "We reviewed this from various angles but decided not to include it in the measures." After President Yoon Suk-yeol was elected, the Presidential Transition Committee also deliberated on DSR regulations but decided to maintain the current system to protect actual demanders.

Nevertheless, the Bank of Korea’s first mention of applying DSR regulations to Jeonse loans during a period of falling Jeonse prices in the financial stability report indicates the urgency of managing household loans. A Bank of Korea official explained, "Jeonse loans have led the increase in household loans since COVID-19, and if DSR regulations are not applied, gap investments and household loan increases could continue through this channel, so a response is necessary."

Instead, the Bank of Korea explained that since Jeonse loans play an important role in stabilizing housing for low-income households, it is necessary to apply regulations differently to those without homes and those who own homes. The idea is to continue supporting Jeonse loans for actual demanders without homes for housing stability, while strictly applying DSR when the loans are likely used for investment purposes by homeowners.

However, it is uncertain whether such proposals will be accepted. The government recently announced measures to ease real estate loan regulations in the "2023 Economic Policy Direction," but decided to maintain the DSR regulation for now. Some argue that with Jeonse prices falling sharply recently, adding regulations could further increase liquidity and credit risks for landlords. A Bank of Korea official explained, "If the premise is to distinguish actual demanders in the regulations, it is worth considering from the perspective of curbing household loan growth."

[Image source=Yonhap News]