"Household Loan DSR Calculation Should Switch to After-Tax Net Income Basis"

Korea Institute of Finance Report on 'The Necessity of Household Loan Regulations Focused on Actual Demand and Financial Considerations'

Source: Korea Institute of Finance

[Asia Economy Reporter Park Sun-mi] There have been calls for expanding discussions to shift household loan regulations, which were implemented in response to the rapid increase in domestic household loans, toward demand-driven loan regulations. It is suggested that the principal and interest installment repayment method should be made mandatory, and that unnecessary loan demand should be reduced through total debt service ratio (DSR) regulations based on net income criteria.

On the 9th, Senior Research Fellow Koo Bon-sung of the Korea Institute of Finance stated in the report titled "The Necessity of Demand-Driven Household Loan Regulations and Financial Considerations" that as household loan regulations are being strengthened mainly on mortgage loans in response to the rapid increase in domestic household loans, there is a need to gradually discuss a shift toward a demand-driven loan policy. He explained that until now, except for mortgage loans, domestic financial companies tended to meet loan demand rather than assess the appropriateness of the loan purpose during screening, which led to a rapid increase in loans within a short period.

Research Fellow Koo said, "The most critical consideration in financial judgment regarding demand-driven loans is to evaluate the borrower's repayment capacity and to conduct post-management to ensure that the loan purpose and usage align," adding, "In the case of mortgage loans, it is necessary to comprehensively assess how to procure and repay the entire housing purchase cost over the borrower's lifetime, and it is essential to make principal and interest installment repayment mandatory in principle."

The principal and interest installment repayment method is said to increase self-selective incentives for borrowers to optimize loan size by considering the cost of principal repayment, thereby discouraging unnecessary or speculative loans.

Research Fellow Koo also stated, "Regarding the calculation of DSR including principal and interest, it is necessary to consider gradually shifting from using total income as the basis to using net income, which excludes taxes and reflects the actual amount available for repayment," adding, "From a public policy perspective, reducing policies linked to housing prices and linking repayment capacity to the borrower's income level can enhance repayment feasibility."

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