Will Jeonse Loans Really Be Restricted? Government Weighs Applying DSR to Jeonse Loans [Financial Microscope]

The government is considering applying DSR to jeonse loans as part of household debt management
Jeonse loans are seen as one of the main drivers of overheating in the housing market and rising household debt
Regulations expected to be implemented immediately if instability in real estate persists

As the household debt problem grows increasingly serious, the government continues to enforce strict lending regulations. A representative example is last month's announcement of a household debt management plan that limits the maximum amount of mortgage loans for homes in the Seoul metropolitan area to 600 million won. Despite these strong regulations, instability in the real estate market persists, and the growth of household debt has not slowed. If these trends continue, additional measures are expected, such as applying the Debt Service Ratio (DSR) to jeonse loans or further tightening the Loan-to-Value (LTV) ratio in regulated areas.

The government is considering applying DSR to jeonse loans as part of household debt management

According to the financial sector on the 16th, the Presidential Policy Planning Committee, the Financial Services Commission, the Bank of Korea, and other government agencies believe that the side effects of excessive household debt have become severe this year, especially as real estate prices for apartments in Seoul have risen sharply. According to the Financial Services Commission, the total balance of household loans in the financial sector increased by 6.5 trillion won last month compared to the previous month. This is the largest increase in eight months since the 6.5 trillion won rise recorded in October last year. The main driver of household loan growth was mortgage loans. Last month, mortgage loans increased by 6.2 trillion won, the largest monthly increase in nine months since September last year.

As excessive household lending continues due to the overheating real estate market, the ratio of household debt to gross domestic product (GDP) in Korea has risen to 90%, the highest level in the world. Experts warn that Korea’s excessive household debt is creating a vicious cycle that restricts consumption and leads to a slump in domestic demand. On July 10, Bank of Korea Governor Rhee Changyong diagnosed, “Korea’s household debt level has risen close to 90% of GDP, and if it grows further, various side effects may arise. Even at the current level, it is already at a critical point that significantly restricts consumption and growth.” He explained, “The government’s lending regulation policy is desirable. If real estate prices in Seoul and the metropolitan area continue to spread, it will cause not only social and political problems but also many issues such as despair among the younger generation, so it is important to stabilize prices.”

The government believes that the trend of increasing household loans may continue in July and August. Even though a plan to strengthen household debt management by limiting mortgage loans in the Seoul metropolitan area to 600 million won was announced on June 27, and the third-stage stress DSR regulation has been implemented since this month, the growth in household loans is expected to persist. An official from the Financial Services Commission said, “It is true that the amount of mortgage loan applications at banks has decreased since the announcement of the strengthened household debt management plan last month. However, considering the volume of real estate transactions and the amount of loan approvals that have already occurred, the upward trend in household loans may continue for the time being.”

A view of apartment complexes in downtown Seoul from Namsan, Seoul. 2025.06.27 Photo by Dongjoo Yoon

Regulations expected to be implemented immediately if instability in housing prices and household debt persists

If the trend of increasing household loans continues, additional regulations will be inevitable. The most prominent additional regulation is the application of DSR to jeonse loans. DSR is a lending regulation that limits the total annual principal and interest payments on all loans to no more than 40% of the borrower’s annual income (for banks). With the implementation of the third-stage stress DSR this month, loan limits have been reduced even further compared to the second stage.

However, until now, jeonse loans and policy mortgages have been excluded from DSR application in order to support housing stability for low- and middle-income households. Because jeonse loans were not subject to regulation, this led to excessive supply, which in turn caused a rise in jeonse prices, an increase in gap investment, and a vicious cycle of rising home prices. The Financial Services Commission stated in a policy report to the Presidential Policy Planning Committee last month that if instability in housing prices continues, the scope of DSR application could be expanded to include jeonse loans and others.

The government is reportedly considering a plan to first include only the interest payments, excluding the principal, of jeonse loans under DSR regulation if household debt instability persists. If this regulation is implemented, existing borrowers with large amounts of loans will see their jeonse loan limits significantly reduced. This is expected to help prevent gap investment using jeonse loans. According to the Ministry of Land, Infrastructure and Transport, about 40% of apartment sales in Seoul from January to May this year were gap investments involving jeonse. Gap investment is one of the main factors that undermine the effectiveness of the government’s real estate regulations.

In addition, the government is also considering applying DSR to policy funds such as the Buteimmok and Didimdol programs, as well as further tightening LTV ratios in regulated areas. Currently, the LTV ratio for first-time homebuyers is up to 50% in regulated areas and up to 70% in non-regulated areas, but the government plans to tighten these ratios further to reduce loan limits. There are also discussions about raising the risk weight for mortgage loans to reduce banks’ lending capacity. An official from the Financial Services Commission explained, “If the household debt problem is not resolved, additional regulations will be unavoidable.”