[Real Estate Finance] DSR and Bank Loan Regulations Cause Confusion for Genuine Borrowers... 'Exceptions' Will Be Allowed

Newlyweds expecting their first child and first-time homebuyers, among other genuine housing demand groups, are experiencing confusion due to loan regulations imposed by financial authorities and banks. Alarmed by the rapid increase in household debt, financial authorities tightened the Debt Service Ratio (DSR) regulations, reducing loan limits. On top of that, banks have each introduced their own loan restrictions, compounding the issue. As various loan regulations are leading to actual harm to genuine borrowers rather than curbing the rise in household loans, financial authorities have begun to 'streamline' the loan regulations. Banks are also managing the situation by disclosing cases that qualify for exceptions.

Even Ordinary Seoul Office Workers... Loan Limits Reduced by 10% in Just a Few Days

On the 10th, Asia Economy requested a simulation from a commercial bank applying the Stage 2 Stress DSR measure. The result showed that an office worker with an annual salary of 75 million KRW currently living in the metropolitan area, taking out a 30-year maturity, equal principal and interest repayment variable-rate (6-month COFIX) mortgage loan at an annual interest rate of 4.0%, would have a maximum loan limit of 455 million KRW.

The annual salary of 75 million KRW reflects last year's average household income in Seoul (73.69 million KRW). Until last month, under the same conditions, the loan limit available to such an office worker in the metropolitan area was 500 million KRW. In just a few days, the loan limit decreased by about 9.0% (45 million KRW).

This reduction in loan limits is due to the expansion of the stress interest rate applied to loan interest rates starting this month. Before the implementation of Stage 2 DSR, the interest rate applied to this borrower was 4.38% annually (bank interest rate 4.0% + stress interest rate 0.38 percentage points), and if the borrower fully utilized the DSR, the loan limit was 500 million KRW (annual principal and interest repayment of 29.97 million KRW). However, after the implementation of Stage 2 DSR, the loan interest rate rose to 5.20% annually (bank interest rate 4.0% + stress interest rate 1.20 percentage points) due to the strengthened stress interest rate, increasing the principal and interest to be repaid and consequently reducing the loan limit.

For dual-income couples with an annual income exceeding 100 million KRW, the loan limit decreases by nearly 100 million KRW. A couple with a combined income of 130 million KRW applying for a variable-rate mortgage loan under the same conditions has a maximum loan limit of 789 million KRW. This is a reduction of 78 million KRW compared to 867 million KRW before the Stage 2 DSR application.

To avoid such reductions in loan limits, borrowers have no choice but to respond by extending the loan maturity. For products with longer maturities, the annual principal and interest repayment is lower compared to shorter-term products, effectively reducing the DSR and thereby increasing the loan limit.

However, major commercial banks such as KB Kookmin, Shinhan, and Woori Bank have recently reduced the maximum mortgage loan maturity, which used to be as long as 40 to 50 years depending on age, to a maximum of 30 years, effectively blocking this strategy. Conversely, this increases the annual principal and interest repayment, resulting in a reduction of the loan limit.

To Make Matters Worse, Banks' 'Inconsistent' Regulations... Authorities Step in to Streamline

Due to these loan limit and maturity regulations, the previously rapid increase in household loans has somewhat stabilized. As of the 6th, the outstanding balance of mortgage loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was 570.0134 trillion KRW, an increase of only 1.3518 trillion KRW compared to the previous month.

It is generally assessed that the banks' 'strong measures' played a significant role in this. As supervisory authorities demanded stricter loan regulations, banks competitively strengthened their loan restrictions. For example, Woori Bank announced that starting from the 9th, it would no longer provide mortgage loans or jeonse (long-term deposit) loans to homeowners in the metropolitan area. This was intended to curb speculative demand from multi-homeowners and gap investments. Following Woori Bank, other banks have also joined this trend.

The problem is that following the reduction in loan limits, these inconsistent regulations by banks are causing significant harm to some genuine borrowers. For instance, conditional mortgage loans that require the disposal of an existing home for one-homeowners have also been suspended, leaving genuine borrowers preparing to move stuck. A one-homeowner in the metropolitan area preparing to move said, "I have already paid the deposit for the new house, but I am worried that the loan might not come through," adding, "I even search the names of financial institution officials every day."

A 'balloon effect' is also occurring. When banks block mortgage loans, borrowers turn their attention to unsecured loans or move to secondary financial institutions for loans. In fact, loans from the five major commercial banks amounted to 103.8702 trillion KRW as of the 6th, an increase of 414 billion KRW compared to the end of the previous month. More than 400 billion KRW in new unsecured loans were made within just a few days after the implementation of Stage 2 Stress DSR and the full operation of each bank's regulatory measures. Authorities are currently reviewing management plans for unsecured loans.

Financial authorities and banks have begun to streamline regulations to reduce harm to genuine borrowers. For example, Shinhan and Woori Banks have made exceptions allowing one-homeowners to obtain new mortgage loans on the condition that they dispose of their existing home. Additionally, exceptions will be allowed for jeonse loans or unsecured loans if borrowers submit documents proving specific circumstances such as marriage, funeral, or other life events.

Lee Bok-hyun, Governor of the Financial Supervisory Service, apologized for the recent confusion over loan regulations during a press conference following a meeting with bank CEOs yesterday. He said, "(At the meeting) since each bank has a different loan portfolio, we agreed to set specific standards for screening but discuss gray zones with the Korea Federation of Banks," adding, "I told banks to manage the process with a systematic and gradual schedule to avoid misunderstandings about a loan cliff."