Reviewing Household Loan Management Measures Q&A

How Much Will Loan Limits Decrease with the Expanded Implementation of DSR?

[Asia Economy Reporter Park Sun-mi] The total debt service ratio (DSR) 40% regulation, which previously applied only to new mortgage loans secured by houses priced over 900 million KRW in speculative areas and speculative overheating districts, and to high-income earners with annual income exceeding 80 million KRW whose total credit loans exceed 100 million KRW, will be expanded in three phases starting this July.

From July, the DSR 40% regulation per borrower will apply when taking out new mortgage loans secured by houses priced over 600 million KRW in all regulated areas or when receiving credit loans exceeding 100 million KRW regardless of annual income. In the third phase, July 2023, the DSR 40% regulation per borrower will apply to those whose total loan amount exceeds 100 million KRW.

Below is a Q&A on the financial authorities' household debt management plan.

- How much will loan limits decrease with the expanded DSR implementation?

▶ DSR is a regulation aimed at consumer protection to ensure loans are handled within the borrower's repayment capacity. For genuine demand borrowers who use loans within their income range, the impact on loan limits will not be significant. On the other hand, speculative demand (such as gap investment) investing in real estate through excessive financial borrowing beyond income is expected to be relatively greatly affected.

For a mortgage loan with equal principal and interest repayment, loan interest rate of 2.5%, maturity of 30 years, and DSR 40% applied (assuming no other loans), a borrower with an annual income of 20 million KRW can borrow up to 169 million KRW, a borrower with 50 million KRW income up to 422 million KRW. Also, a borrower with 80 million KRW income can borrow up to 675 million KRW, and one with 100 million KRW income up to 844 million KRW as the maximum mortgage loan limit.

- Are group loans (interim payment and relocation loans) included in DSR calculation?

▶ Since interim payment loans are customarily refinanced through balance payment loans later, they are excluded from the application based on exclusion criteria (existence of repayment resources other than income).

- From July 2023, if actual maturity is applied to revolving credit loans (such as overdraft accounts), will the limit be reduced to 40% of income?

▶ The principle that loans are handled within repayment capacity applies not only to credit loans but to all loans. If actual maturity is applied after July 2023, the limit for revolving credit products with a one-year maturity may be restricted to within 40% of annual income. However, during the remaining period before the system implementation, changes in loan handling practices such as multi-year credit loans with installment repayment conditions and adjustment of contract maturity (from 1 year to 3-5 years) will be encouraged to minimize financial access difficulties for genuine demand borrowers.

- Will credit loan limits be shortened due to maturity adjustments in the DSR calculation process, especially for revolving credit loans?

▶ Currently, a uniform maturity of 10 years is applied regardless of actual maturity when calculating credit loan DSR, which limits accurate reflection of actual repayment capacity. To address this drawback, from July 2023, the actual contracted maturity will be applied in principle when calculating DSR by improving related conditions. To avoid sudden impacts on the financial market, the applied maturity for credit loans will be gradually reduced from '10 years (current) → 7 years (July 2021) → 5 years (July 2022)' to provide sufficient preparation time. During this period, changes in loan handling practices such as multi-year credit loans with installment repayment conditions and contract maturity adjustments (from 1 year to 3-5 years) will be encouraged.

- When borrower-level DSR is fully implemented, loan screening may become difficult for borrowers whose income is hard to verify. Will various income estimation methods beyond documented income be allowed?

▶ In addition to documented income such as income tax payment data, the plan is to broadly utilize recognized income through National Pension and health insurance premium payment data. Continuous improvements will also be pursued for income estimation methods using various related data such as sales, rental income, financial income, and new techniques.

For example, by operating various income recognition methods, a retiree receiving a monthly pension of 500,000 KRW with no other loans except a 10-year maturity, 3% interest credit loan subject to DSR regulation can be recognized with pension income of 6 million KRW annually and thus borrow up to 18 million KRW in credit loans. A business owner who is temporarily closed but paying 100,000 KRW monthly in health insurance premiums can use the health insurance premium payment amount as recognized income to obtain about 100 million KRW in credit loans. A full-time housewife using credit cards worth 15 million KRW annually can estimate annual income using credit card usage and borrow up to 92 million KRW in credit loans.

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