[1mm Financial Talk] "Youth Loans to Reflect Future Income... But Useless if Interest Rates Rise"

Strengthened DSR Regulations Starting in July

Simulating Loan Amounts Available by Period

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] Although financial authorities have announced plans to ease loan regulations for young people by reflecting their expected future income, it has been found that this effect is overshadowed during periods of rising interest rates.

The Financial Services Commission will apply strengthened Debt Service Ratio (DSR) regulations from next month, stipulating that "when taking out loans of 100 million KRW or more, the principal and interest repayment amount cannot exceed 40% of annual income." The DSR regulation, created under the principle of "borrow only what you can repay," was applied to loans over 200 million KRW in the first half of this year, and will be strengthened to apply to loans over 100 million KRW starting in July.

A major issue with this system is that "the loan limits for young people with low annual salaries are significantly reduced." Among young people, complaints such as "Are we not even getting a chance to buy a house?" have erupted. To address this inequality, the authorities announced that they would increase the ratio of expected future income applied when young people in their early 20s to mid-30s take out loans, thereby raising their loan limits. However, the financial industry evaluates that this system is useless during times of rapidly rising interest rates like now.

On the 27th, Asia Economy, together with a commercial bank, analyzed the "amount of mortgage loan available when Mr. Kim, a 34-year-old office worker earning an annual salary of 36 million KRW, tries to purchase a 600 million KRW apartment by setting the loan application amount at 240 million KRW" over different periods (see table). As a result, compared to July last year, the loanable amount in July this year decreased by nearly 100 million KRW even assuming that Mr. Kim’s future income reflection ratio increased (240 million KRW → 159.5 million KRW). Assuming that the Bank of Korea’s base interest rate rises by more than 1 percentage point by December this year, the loanable amount will decrease by 22.6 million KRW compared to July due to increased interest costs, and will be halved compared to July last year (240 million KRW → 136.9 million KRW).

In the simulation, reflecting the current borrowing behavior of office workers, Mr. Lee was set to have a 30 million KRW overdraft account. Mr. Kim’s income, housing price, and mortgage loan application amount were set the same. Under these assumptions, the mortgage loan limits were compared assuming the periods of July last year (no borrower-level DSR regulation applied, 12% future expected income reflected) → July this year (DSR 40% applied for loans over 100 million KRW, 13.1% future expected income reflected) → December this year (1 percentage point interest rate increase). If 13.1% of future expected income is reflected, the DSR is applied at 113.1% of the current annual salary.

Regarding the significant decrease in Mr. Kim’s loan limit despite expectations from reflecting future income, a commercial bank official said, "When interest rates rise, the effect of reflecting future income is offset, so young people will not feel much benefit when taking out loans," adding, "Although this measure was introduced to appease young people’s backlash, it has become ineffective."

While young people may feel disappointed, there is also an analysis that this can reduce risk in terms of curbing household loans during periods of rising interest rates. Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "When interest rates rise, banks giving out large amounts of loans can become predatory lending," and added, "Currently, interest rate risk is high, so it is appropriate to provide loans within a manageable range of repayment based on income."

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