Loans Will Become Harder to Obtain in the Second Half of the Year... Why? [Financial Microscope]

Stress DSR Phase 3 to Take Effect in July
Jeonse Loan Guarantee Ratios to Be Lowered Starting in May

Starting from the second half of this year, it is expected to become more difficult to obtain loans. This is due to the upcoming implementation of the third phase of the stress Debt Service Ratio (DSR) and the accelerated timing of adjustments to the guarantee ratio for jeonse (lease deposit) loans. The adjustment to the guarantee ratio for jeonse loans, originally scheduled for July, has been moved up by about two months, which is expected to raise the perceived loan threshold for borrowers.

What is the Stress DSR Phase 3, effective from July?

The stress DSR is a system that strictly evaluates a borrower's repayment ability during loan screening by applying a stress (additional) interest rate to the existing DSR, thereby reducing the loan limit. It was introduced to precisely reflect interest rate fluctuation risks in the DSR, prevent excessive household loans beyond repayment capacity, and improve the quality of household debt. The stress DSR was previously implemented in two phases: Phase 1 in February last year and Phase 2 in September. In Phase 1, a stress interest rate of 0.38 percentage points was applied to bank mortgage loans; in Phase 2, an additional interest rate of 1.2 percentage points in the metropolitan area and 0.75 percentage points in non-metropolitan areas was applied to bank mortgage loans, credit loans, and second-tier financial institution mortgage loans.

From July, under Stress DSR Phase 3, a stress interest rate of 1.5 percentage points is expected to be applied to bank and second-tier financial institution mortgage loans, credit loans, and other loans. Consequently, loan limits are expected to be significantly reduced.

In particular, it is anticipated that it will become more difficult for multi-homeowners and high-income earners to obtain loans. For example, a person with an annual income of 100 million KRW, applying for a 30-year term loan with equal principal and interest payments and a variable interest rate, can currently borrow up to 604 million KRW. However, under Stress DSR Phase 3, this limit will decrease by about 50 million KRW to 556 million KRW.

Additionally, in Seoul and the metropolitan area, new mortgage loans for multi-homeowners will be restricted. Conditional jeonse loans, which may be used for gap investment (purchasing a property with a jeonse lease), will also be limited.

Jeonse loan approvals are also becoming more stringent

Starting in May, the guarantee ratios for jeonse loans provided by SGI Seoul Guarantee and the Housing and Urban Guarantee Corporation (HUG) will be adjusted from the current 100% to 90%. Jeonse loan guarantees are products where guarantee insurance institutions guarantee the repayment of jeonse loans when borrowers obtain such loans from banks.

This adjustment aims to unify the guarantee ratio with that of the Korea Housing Finance Corporation (HF), one of the three major guarantee institutions, which currently stands at 90%. Originally scheduled for implementation in July, this change has been brought forward by about two months. There are also discussions about further lowering the guarantee ratios of guarantee institutions.

The reduction in guarantee ratios responds to criticism that the previously high guarantee ratios encouraged indiscriminate jeonse loans. It has been pointed out as a factor inducing gap investment, as tenants could obtain loans without burden even if jeonse prices rose. Moreover, since guarantee institutions guaranteed 100% of the jeonse price, banks issued loans without collateral, leading to relatively lenient screening compared to other loans. With lower guarantee ratios, banks will bear some risk, which may lead to stricter loan screening.

Banks have already raised loan thresholds independently

Yonhap News

Even before the full-scale implementation of regulations, there are concerns that borrowers already feel the loan thresholds are high as banks independently manage household debt.

Hana Bank stopped accepting new mortgage loans for home purchases and conditional jeonse loans for homeowners in the Seoul area starting April 27. Additionally, from May 10, it lowered preferential interest rates for mortgage and jeonse loans for customers with multiple children. NH Nonghyup Bank ceased handling conditional jeonse loans in the Seoul area from April 21. SC First Bank stopped mortgage loans for living stabilization purposes for multi-homeowners from April 26 and also halted mortgage loans for home purchases by single-homeowners in Seoul from May 3.

A representative from a commercial bank said, "The loan regulations currently implemented by commercial banks are limited to multi-homeowners and will not significantly affect genuine homebuyers without homes. However, with the lifting of land transaction permission zones and the impact on household debt expected in April and May, coupled with the announcement of Stress DSR Phase 3 in July, there is a tendency for future loan demand to surge as borrowing becomes more difficult."