[News Terms] Loan Limits Further Reduced, 'Stress DSR'

The 'Stress DSR (Stress Debt Service Ratio)' that the government plans to introduce from next year refers to a method of calculating the loan limit by applying a certain level of additional interest rate to the total debt service ratio (DSR), which is the method of determining the loan limit.

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First, DSR refers to the ratio of the annual principal and interest repayment amount of various financial debts to the borrower's annual income when taking out a loan. In other words, if the current loan regulation sets the DSR at 40%, it means that the principal and interest of the loan to be repaid within one year should not exceed 40% of the borrower's annual salary. The key point here is that all loans, including mortgage loans, credit loans, and card loans, are included in the loan principal and interest, which contrasts with the debt-to-income ratio (DTI) that only includes mortgage principal repayments. While DTI considers only mortgage principal and interest repayments and other loan interest repayments, DSR goes a step further by including the principal repayment burden of all other financial sector loans besides mortgages, making it a stricter household debt regulation than DTI. Even stricter than this is the Stress DSR, which calculates the loan limit by adding an additional interest rate. It is essentially the ultimate household loan regulation. For example, if a financial consumer with an annual income of 50 million KRW takes out a loan with a 50-year term (loan interest rate 4.5%) applying a DSR of 40%, they can receive up to 400 million KRW if they have no existing loans. However, if the loan limit is calculated using the Stress DSR method by applying an additional interest rate of 1 percentage point, the loan limit decreases to 340 million KRW.

The additional interest rate for the Stress DSR applied from next year is determined by comparing the highest household loan interest rate in the past five years with the current interest rate (based on May and November each year). The minimum is 1.5%, and the maximum is 3.0%. The weighted average interest rate for new household loans at deposit banks, announced monthly by the Bank of Korea, is used to calculate the additional interest rate for the Stress DSR.

However, the method of applying the additional interest rate varies depending on the type of loan. First, for variable interest rate loans, the additional interest rate calculated as the difference between the highest interest rate in the past five years and the current interest rate is applied as is. For example, if the additional interest rate is 1.5%, a borrower with an existing loan interest rate of 4% who takes out a variable interest rate loan will have their loan limit set based on 5.5%, which is the sum of the existing interest rate and the additional interest rate (1.5%). As the loan interest rate rises, the interest amount increases, resulting in a reduced loan limit.

On the other hand, mixed loans (products that apply a fixed interest rate for a certain period before switching to a variable interest rate) and periodic loans (products where the interest rate changes periodically and a fixed interest rate applies during that period), which have lower interest rate fluctuation risk compared to variable interest rate loans, have the additional interest rate calculated at a more relaxed level.

For mixed loans, the higher the proportion of the fixed interest rate period within the total loan term, the lower the applied stress interest rate. For a 30-year loan, loans with a fixed period of 5 to 9 years apply 60% of the stress interest rate applied to variable interest rates, while loans with fixed periods of 9 to 15 years and 15 to 21 years apply 40% and 20%, respectively, of the stress interest rate as an additional interest rate.

The additional interest rate for periodic loans is determined at a more relaxed level than for mixed loans. For a 30-year loan, loans with an interest rate change cycle of 5 to 9 years apply 30% of the stress interest rate applied to variable interest rates, 9 to 15 years apply 20%, and 15 to 21 years apply 10% of the stress interest rate as an additional interest rate.

The government's decision to introduce the Stress DSR, which is stronger than the DSR, is to manage the rapidly increasing household debt. According to the Bank of Korea, as of the third quarter of this year, the balance of household credit (household loans + sales credit) reached a record high of 1,875.6 trillion KRW. As a result, credit risk is also increasing. The household loan delinquency rate in the third quarter of this year was 0.89%, up 0.06 percentage points from the first quarter.