Income-based lending rules will be tightened against a backdrop of snowballing household debt

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South Korea’s main financial regulator said on Tuesday it would implement more stringent lending calculations for mortgages, known as the “debt service ratio” or DSR, months earlier than expected under measures additional debt control.

The DSR measures how much borrowers pay for principal and interest as a proportion of annual income.

Since July, a 40% DSR has been applied to borrowers seeking loans for the purchase of properties valued at over 600 million won ($ 513,000), down from the previous 900 million won. Under the regulations, banks can only grant loans as long as the annual repayment of principal and interest from borrowers does not exceed 40% of annual disposable income.

The Financial Services Commission originally planned to extend the 40% DSR rule to borrowers with loans, including real estate-backed loans, of more than 200 million won in July next year.

The authority decided to impose lending regulations six months earlier in January, however, amid growing concerns about the pace of household debt growth. South Korean household debt hit a record 1,805.9 trillion won in June, up 41,2 trillion won from three months earlier.

“With abundant liquidity triggered by the expansionary fiscal and monetary policies in effect, the growing risks associated with snowballing household debt have increased sharply. Taking as many loans as possible and paying them off bit by bit would be the starting point for managing household debt, ”Financial Services Commission Chairman Koh Seung-beom said in a statement.

“In order for repayment capacity based lending practices to take root in the financial market, (we need to) improve the real efficiency of the DSR system,” he added.

In July 2023, the loan limit will be applied to those with more than 100 million won in unsecured debt.

The FSC will also toughen loan calculations for second-tier banks, lowering the current 60 percent DSR rule to 40 percent.

Meanwhile, to protect those who really need to borrow, the FSC will not apply the 40% RSD rule to “jeonse” loans. Jeonse is a unique housing rental system in Korea, where tenants pay a lump sum deposit instead of a monthly rent on a two-year contract.

By Choi Jae-hee ([email protected])


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