"Let's Get It Before Regulation"... Will the Last-Minute Yeongkkeul Loan Rush Recur? (Comprehensive)

"Get More Loans Before They Are Blocked"
Increase in Customer Inquiries About Loan Limits

[Asia Economy Reporters Sunmi Park, Hyojin Kim] "I think I need to apply for an additional unsecured loan. I don't have immediate plans to use a large sum of money, but since I might need it for future stock or real estate investments, I should get more loans before they get restricted." (Post by Mr. A on an online community)

"We expect a temporary increase in household loans as 'last-minute' customers rush to get loans before the regulations take effect." (Employee at B Bank Jung-gu Branch)

Despite financial authorities' explanation that the household debt regulations effective from July will not significantly affect loan limits for actual borrowers, concerns are growing that there will be a surge in debt-financed investments (debt investment) and all-in borrowing (pulling together all resources) before the implementation. On the 30th, questions about changes in loan limits following the announced household debt management measures and concerns about a rush in loan demand before the new regulations take effect in July flooded bank branches and investment-related online communities.

What Does the Household Debt Management Plan Include?

The Debt Service Ratio (DSR) 40% regulation, which previously applied only when taking out new mortgage loans on homes priced over 900 million KRW in speculative or overheated speculation zones, or when high-income earners with annual income over 80 million KRW had total unsecured loans exceeding 100 million KRW, will be expanded in three stages starting this July.

From July, the DSR 40% rule will apply to new mortgage loans on homes priced over 600 million KRW in all regulated areas, and to unsecured loans exceeding 100 million KRW regardless of income. By the third stage in July 2023, the DSR 40% regulation will apply to borrowers whose total loans exceed 100 million KRW.

Currently, about 28.8% of borrowers have loans exceeding 100 million KRW, accounting for 76.5% of total household loans, meaning that 3 out of 10 borrowers will face reduced loan limits and increased debt repayment burdens. Additionally, starting next month, Loan-to-Value (LTV) ratios will be applied to non-residential collateral loans such as land, officetels, and commercial properties, similar to housing loans. Loan limits will be capped at a maximum of 70% of market value, and non-residential real estate in land transaction permission zones will have an LTV capped at 40%.

The Financial Services Commission believes there will be no market disruption due to this announcement. A Financial Services Commission official emphasized, "More than 90% of borrowers will not feel any immediate changes." However, financial consumers, who have recently used speculative loans for real estate and stock investments through debt investment and all-in borrowing, interpret this as a strong signal to tighten loans and are preparing to respond accordingly.

Concerns Over Reduced Loan Limits and Increased Debt Repayment Burden After Household Debt Management Plan Announcement

With loan demand having increased due to COVID-19, concerns that borrowing will become more difficult are expected to lead to demand for loans before the regulations take effect. When financial authorities announced credit loan regulations last November, other loans including bank credit loans surged to record levels, and at the beginning of this year, fears of additional high-value credit loan regulations caused a sharp increase in overdraft account issuance as a side effect.

In fact, bank branches are flooded with inquiries from customers who interpret the household debt management plan as a government measure to reduce loan limits and want to secure loans in advance. An employee at C Bank's Jung-gu branch said, "Demand to secure funds through credit loans before the regulations take effect is expected to increase significantly starting next month," adding, "There has been a noticeable increase in related inquiries immediately after the government announcement."

There are also concerns that the overall loan approval threshold in the banking sector will rise. The background of the household debt management plan includes a goal to reduce the household debt growth rate, which was 8%, to 5-6% this year and 4% next year. In other words, to keep loan growth moderate, banks will inevitably have to raise the bar for loan approvals.

An official at D Bank Yeouido branch said, "The goal is to reduce the growth rate to about half of last year's level, so loan screening at the frontline will inevitably become stricter," and predicted, "Measures such as reducing or eliminating preferential interest rates, raising interest rates, and suspending sales of some loan products, which have been ongoing since last year, are likely to become stronger and more permanent."

There are also concerns that expanding the DSR 40% application from homes priced over 900 million KRW to those over 600 million KRW will make it more difficult for low-income households to obtain loans for home purchases. An employee at E Bank Mapo branch advised, "Due to the spread of COVID-19, many low-income people use overdraft accounts, and if they want to take out loans to purchase homes priced over 600 million KRW while already having existing loans, they will face limits on loan amounts, which may lead some to advance their payment schedules and secure loans before July."

There are also criticisms that banks' buffer capital accumulation burdens have increased. The banking industry views the additional capital accumulation obligation proportional to the share of household loans in total loans as a potential long-term burden. Considering that household loans account for about 60% of total loans in commercial banks, it is highly likely that an additional 1.5 percentage points or so will be imposed.

This content was produced with the assistance of AI translation services.