Moon Administration Declares 'Full-Scale War' on Household Debt... Early DSR Implementation and Jeonse Loan Regulations Indicated (Comprehensive)

30th Government to Chair Macroeconomic Financial Meeting
"Household Debt a Risk to Korean Economy, Curb Increase as Much as Possible"
Concerns Over Burden on Low-Income Real Demanders Due to High-Intensity DSR and Jeonse Regulations

[Asia Economy Reporter Kim Jin-ho] The heads of the four major economic and financial authorities of the government have unanimously declared an all-out war against household debt. As it has become increasingly difficult to curb the growth rate of household debt despite successive measures, they threatened to mobilize all available means. The phenomenon of a ‘loan famine’ is already occurring due to the total household debt management, and they are set 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 loan needs 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 Jeong 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’ to be 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 stated, "(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 of loan principal and interest 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 expand to total loan amounts exceeding 200 million KRW and 100 million KRW, respectively.

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

Possibility of Jeonse Loan Restrictions Rising... Low-income and Genuine Demand Borrowers Face Hardship

The additional household debt measures are also expected to include restrictions on jeonse loans. Financial authorities have repeatedly issued warnings to the market about this. Their judgment is that some people 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 amounts from 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 that the early introduction of the DSR and restrictions on jeonse loans are expected to increase the burden on low-income and genuine demand borrowers. The DSR regulation, which determines loan limits based on income verification, will inevitably hit low- and middle-income earners and self-employed individuals hardest. Regarding jeonse loans, there are concerns about damage to all genuine demand borrowers who intend to move in the fall moving season. A financial sector official pointed out, "The stricter the loan regulations become, the more the damage will ultimately fall on ordinary citizens and genuine demand borrowers," adding, "We must be cautious of the side effects where only those with money benefit."

The government’s all-out 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% range. Next year, it plans to lower it to the pre-COVID-19 level of the 4% range and maintain this target beyond next year.

Meanwhile, after the meeting, the heads of the four major economic and financial authorities told reporters, "We agreed that the rapid increase in household debt could pose a burden on the real economy."

They reaffirmed their stance to manage household debt by targeting a 6% growth rate this year and ensuring loans are made within repayment ability, continuing this approach next year. They also mentioned that they will consider protecting borrowers with essential loan needs and plan to announce ‘additional household debt measures’ in October.

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