Weakened Non-Homeowners LTV 90% Allowed... 10%p Relaxation Plan Prevails

Representative Song Young-gil strongly pushed forward, but realization uncertain due to opposition from pro-Moon lawmakers
Majority opinion favors 10% preferential treatment for LTV·DTI... Loan limit for 600 million won house set at 420 million won

Apartment area viewed from the Lotte World Tower Observatory in Songpa-gu, Seoul (Photo by Yonhap News)

[Asia Economy Reporter Kwangho Lee] Song Young-gil, leader of the Democratic Party of Korea, strongly pushed for the relaxation of the loan-to-value ratio (LTV) to 90% for non-homeowners, but this plan has faced opposition from the pro-Moon faction within the Democratic Party. As a result, the financial authorities' proposal to ease LTV and debt-to-income ratio (DTI) by 10 percentage points is gaining renewed traction.

A senior government official said on the 21st, "As the feasibility of allowing an LTV of 90% for non-homeowner real demand borrowers has decreased, it is expected that the ruling party will shift towards partially modifying the policy," adding, "The prevailing opinion is to relax housing price and income requirements and provide an additional 10% preferential treatment on LTV." He continued, "Within the Democratic Party's Real Estate Special Committee and the mainstream faction, there is a strong voice to significantly strengthen supply measures in line with the existing government stance rather than easing regulations," and "Above all, the LTV 90% allowance conflicts with the government's position prioritizing household debt management."

Last month on the 29th, the financial authorities declared through the 'Household Debt Management Plan' that they would reduce the financial sector's household debt growth rate, which had risen to the 8% range due to COVID-19, to half, 4%, by next year. To achieve this, they strengthened the debt repayment-to-service ratio (DRS) to 40% and tightened loan limits in the banking sector. Consequently, concerns arose that excessively loosening loans for certain groups could make managing total loan amounts difficult or raise issues of regulatory fairness.

Financial Services Commission Chairman Eun Sung-soo also expressed reluctance, stating, "If housing mortgage loan regulations are relaxed for specific groups, it could send the wrong signals to the real estate market."

The financial authorities have settled on a plan to ease LTV and DTI by 10 percentage points each when determining loan limits for home purchases. Under this plan, in speculative areas and speculative overheating districts, LTV would be preferentially raised to 60%, and in regulated areas, to 70%. Currently, in speculative and speculative overheating districts, the housing price must be 600 million KRW or less (500 million KRW or less in regulated areas), and the combined annual income of the couple must be 80 million KRW or less (90 million KRW or less for first-time buyers).

If both conditions are met, loans can be obtained up to 50% LTV and DTI in speculative and speculative overheating districts (60% in regulated areas). With an additional 10% preferential treatment, for a 600 million KRW house, the loan limit increases from 360 million KRW to 420 million KRW, an increase of 60 million KRW.

There is also discussion about raising the applicable housing price criterion from 600 million KRW or less to 900 million KRW or less, and the combined annual income requirement from 80 million KRW or less to 100 million KRW or less. If income and housing price criteria are relaxed, the number of loan beneficiaries could increase. This reflects criticism that the current preferential system's effectiveness is declining.

However, there is also the possibility that the ruling party may pressure for a further increase in LTV during the final coordination process. Experts warn that allowing a large increase in LTV could transfer excessive risk to financial institutions and lead to major defaults. In the event of a future real estate market downturn or interest rate hikes, borrowers might be unable to repay debts even after selling their homes.

A financial sector official pointed out, "Considering that the 2008 U.S. financial crisis was caused by excessive mortgage loans, there are many negative impacts."

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