Early Implementation of 40% DSR Regulation... Jeonse Loan Restrictions Also Imminent

30th Hong Nam-ki, Deputy Prime Minister, Chairs Macroeconomic Financial Meeting
"Household Debt a Risk to Korean Economy, Curb Increase as Much as Possible"
Concerns Over Burden on Low-Income Real Demand Due to High-Intensity DSR and Jeonse Regulations

[Asia Economy Reporter Kim Jin-ho] The heads of the government's four major economic and financial authorities have unanimously declared an all-out "full-scale war" against household debt. As it has become increasingly difficult to curb the growth rate of household debt despite successive measures, they have threatened to mobilize all available means. The phenomenon of a "loan famine" is already occurring due to the total management of household debt, and they are moving to tighten it even further. With the early implementation of the 40% Debt Service Ratio (DSR) regulation and restrictions on jeonse loans being strongly discussed, it is expected that the burden on ordinary citizens with genuine demand planning to take out loans will increase.

On the 30th, the government held a "Macroeconomic Financial Meeting" chaired by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki to discuss additional household debt management measures based on this plan. The meeting was attended by Lee Ju-yeol, Governor of the Bank of Korea, Ko Seung-beom, Chairman of the Financial Services Commission, and Jung Eun-bo, Governor of the Financial Supervisory Service.

In his opening remarks, Deputy Prime Minister Hong said, "Household debt, which increased due to expanded liquidity during the COVID-19 response, could pose a risk to the Korean economy," and emphasized, "Above all, we will seek ways to suppress the increase in household debt as much as possible while allowing loans within the scope of repayment ability."

As mentioned in the opening remarks, the core of the "additional household debt measures" announced after the national audit early next month is the early introduction of the DSR. It is reported that the top two economic and financial authorities have already reached a consensus on this. On the 27th, Chairman Ko also said, "(The additional household debt measures) will focus on enhancing the effectiveness of repayment ability assessments."

Initially, the Financial Services Commission planned to introduce the 40% DSR regulation in three stages. The 40% DSR limits the repayment amount of principal and interest on loans to within 40% of annual income.

The DSR regulation is currently applied preemptively to purchases of houses over 600 million KRW in regulated areas, mortgage loans, and credit loans exceeding 100 million KRW. Subsequently, from July next year (stage 2) and July 2023 (stage 3), the target will be expanded to total loan amounts exceeding 200 million KRW and 100 million KRW, respectively.

The government's push for early DSR implementation is because household debt shows no signs of slowing despite the first stage of DSR application. In fact, since July, mortgage loans and jeonse loans at the five major commercial banks have increased by about 12 trillion KRW. Therefore, the government is taking "ultra-strong measures" to curb household loans, even at the risk of criticism for ignoring the difficulties of borrowers such as genuine demand borrowers who had planned to take out loans immediately.

Possibility of Jeonse Loan Restrictions Increases... Low-Income and Genuine Demand Borrowers 'Upset'

The additional household debt measures are also expected to include restrictions on jeonse loans. Financial authorities have repeatedly sent warnings to the market about this. Their judgment is that those with spare funds borrow the maximum amount possible through jeonse loans and invest the remaining money in stocks or cryptocurrencies. Chairman Ko recently told reporters, "Since there are criticisms that jeonse loans are advantageous in terms of interest rates and conditions, we will comprehensively review those aspects."

Jeonse loan balances at the five major commercial banks surged 14.02% from 105.2127 trillion KRW at the end of last year to 119.967 trillion KRW as of the end of August. This is about 3.5 times the increase rate of mortgage loans (4.14%) during the same period.

The problem is the concern that the burden on low-income and genuine demand borrowers will increase further due to the early introduction of the DSR and restrictions on jeonse loans. The DSR regulation, which determines the loan limit based on income verification, inevitably hits middle- and low-income earners and self-employed individuals hardest. In the case of jeonse loans, there are concerns about damage to all genuine demand borrowers who intend to live in the property, especially ahead of the autumn moving season. A financial sector official pointed out, "The more loan regulations are strengthened, the more the victims will be ordinary citizens and genuine demand borrowers," adding, "We need to be cautious about the side effects where only those with money benefit."

Meanwhile, the government's full-scale war on household debt is expected to continue beyond next year. The government’s firm stance is to extend the scope of total household debt management beyond next year and to continuously and gradually implement strong measures until the effects of the policies become apparent.

The Financial Services Commission has set this year's household loan growth target at the 6% level. Next year, it plans to lower it to the pre-COVID-19 level of around 4% and maintain this target beyond next year.

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