Yoon Seok-yeol Promises to Raise LTV to 80%... DSR Easing Is the Key

If DSR is not relaxed, low-income individuals will still face loan shortages
Only high-income earners will benefit instead

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] When the new government takes office, it is expected that the tightly blocked loan restrictions will ease to curb household debt. For Yoon Seok-yeol, the president-elect, to implement his real estate-related loan relaxation pledge, the current government's loan regulation policies must be revised. Yoon's stance is that real estate loans should be increased focusing on actual demanders. To this end, he proposed raising the Loan-to-Value ratio (LTV) to 80% for first-time homebuyers and recognizing up to 70% LTV for single-home real demanders.

The current government applies LTVs of ▲40% for properties under 900 million KRW and ▲20% for those exceeding 900 million KRW in speculative areas and speculative overheating districts. Because the LTV ratio is low, even real demanders with insufficient financial capacity have been unable to seize home-buying opportunities. The market predicts that raising the LTV will significantly activate home purchases.

If the intention is to lower the real estate loan threshold for actual demanders, the financial industry points out that easing individual DSR regulations or bank-level household loan growth rate restrictions of around 5% is also necessary to see effects. Without loosening DSR regulations, even if LTV is relaxed, the loan limit increase effect may only appear for high-income earners.

DSR (Debt Service Ratio) is the proportion of debt repayment amount to annual income. Since January this year, borrowers with total household loans exceeding 200 million KRW are subject to a 40% DSR regulation. For an office worker earning 50 million KRW annually, this means they should not spend more than 20 million KRW (40% of income) per year on debt repayment. From July, the DSR regulation will tighten further, applying to loans exceeding 100 million KRW, and the Financial Services Commission forecasts that 5.93 million people will be subject to DSR regulations after July.

The core of the DSR regulation is "borrow according to your income," but at the same time, the lower the income, the less capacity there is to buy a home, which may exacerbate polarization. For example, when buying an apartment priced at 900 million KRW, even if the LTV increases from 40% to 70%, a borrower with an annual income of 50 million KRW will see their loan limit increase only from 360 million KRW (40%) to 373 million KRW (70%), an increase of 13 million KRW due to the DSR regulation. However, for a person earning 100 million KRW annually, the loan limit increases from 360 million KRW (40%) to 630 million KRW (70%), a 300 million KRW increase.

A representative from a commercial bank said, "To provide home-buying opportunities to relatively low-income youth and first-time buyers, DSR must be adjusted," adding, "It will also be necessary to lift the loan total volume management applied by each bank (average household loan growth rate of 4.5% as of 2022) to increase loans."

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