Second Meeting on the 19th with All Financial Sectors Convened
Considering Stricter Application of RTI Regulations at Maturity Extension
While the financial authorities are reviewing the practice of extending loan maturities for multiple-home owners, they will hold a second meeting on the 19th to discuss ways to strengthen regulations on loans to rental business operators. With residential rental business loans worth about 14 trillion won set to come under intensive review, it is expected to become more difficult to obtain maturity extensions.
According to the financial authorities on the 18th, the Financial Services Commission will convene, on the afternoon of the 19th, executives in charge of corporate lending from all financial sectors, including the banking sector and mutual finance institutions, to review how rental business operators are repaying their loans and how loan maturity extensions are being processed. This meeting follows an all-financial-sector meeting held on the 13th, just before the Lunar New Year holiday, and is being convened again immediately after the holiday.
This meeting is expected to focus in particular on issues related to loans to rental business operators among loans to multiple-home owners. Follow-up discussions by the financial authorities have been gaining momentum since President Lee Jaemyung raised concerns about extending the maturity of existing loans for multiple-home owners. President Lee recently remarked, "We have given them several years of opportunity, even cutting capital gains tax, yet multiple-home owners have refused to reduce their holdings. Is it fair to grant them additional loan extension benefits when their loans reach maturity?"
Currently, ordinary mortgage loans for housing generally have a 30- to 40-year maturity with an amortization structure, so principal and interest are fully repaid by maturity and there is little issue of separate extensions. In contrast, loans to rental business operators are initially issued with a maturity of 3 to 5 years and then extended on a yearly basis. The financial authorities plan to closely scrutinize this practice of routinely extending maturities.
As of the end of last year, the outstanding balance of real estate rental business loans in the banking sector stood at 157 trillion won. Of this, loans to residential rental business operators, excluding commercial properties such as retail stores and offices, are reported to total 13.9 trillion won. The financial authorities are highly likely to designate this segment as a key area for intensive management.
In particular, it is reported that the authorities are considering applying the regulation on the Rent to Interest (RTI) ratio more strictly during the review process for maturity extensions. RTI is calculated by dividing annual rental income by interest expenses, and new loans are only allowed if the ratio is at least 1.5 times in regulated areas and 1.25 times in non-regulated areas. For example, if annual interest expenses amount to 10 million won in a regulated area, rental income must be at least 15 million won.
Currently, RTI requirements are reviewed only at the time when a rental business operator’s loan is first issued, but the financial authorities are said to be looking into ways to rigorously apply the same criteria at the time of maturity extension as well.
According to the financial authorities, although new mortgage loans for home purchases have been strictly limited by the June 27 and September 7 measures introduced last year, loans already extended to rental business operators have allowed them to secure funds relatively easily through maturity extensions.
If RTI screening is tightened, some observers suggest that this could lead to an increase in property listings by multiple-home owners. On the other hand, concerns are being raised that repayment pressure could be passed on in the form of higher rents, or that tenants could suffer losses in the event of defaults, given that banks hold priority rights to repayment.
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