Mortgage loan term extended to 40 years, special BoGeumJaRi loan general type abolished

From today, if repayment ability cannot be proven, mortgage loan terms will be limited to a maximum of 40 years
50-year terms likely only available for those 34 or younger
Special BoGeumJaRi will operate only in preferential type... General type discontinued from the 27th

A customer is receiving consultation at a bank loan consultation desk. Photo by Jinhyung Kang aymsdream@

From the 13th, if a person receiving a mortgage loan (hereinafter referred to as a mortgage loan) from a general bank cannot prove their repayment ability, the maximum maturity for calculating the Debt Service Ratio (DSR) will be limited to 40 years. Only if the individual borrower's repayment ability is clearly proven can they receive a mortgage loan with a 50-year maturity.

Starting from the 27th, the conditions for receiving special BoGeumJaRi loans operated by the Korea Housing Finance Corporation will also be restricted. Special BoGeumJaRi loans will be supplied only to the low-income real demand group who meet the criteria of 'combined annual income of a couple below 100 million KRW and housing price below 600 million KRW.'

The Financial Services Commission (FSC) announced these measures on the 13th at a 'Joint Meeting to Review Household Debt Status' held with related ministries. The FSC stated, "Following the recovery trend in housing transactions in July, the increase in mortgage loans centered on banks continues at a level of 5 to 6 trillion KRW in August."

Maximum DSR Calculation Maturity Limited to 40 Years if Repayment Ability Not Proven

First, those who find it difficult to prove their repayment ability will have the DSR calculation maturity applied up to a maximum of 40 years for the entire mortgage loan period. The FSC explained that this is to prevent 50-year maturity loans from being abused as a means to circumvent DSR regulations.

DSR refers to the proportion of principal and interest that must be repaid in one year relative to one's annual income. Since July last year, the FSC has set regulations at 40% for primary financial institutions and 50% for secondary financial institutions. For example, if the annual salary is 50 million KRW, one can only receive loans where the principal and interest repayment does not exceed 20 million KRW or 25 million KRW per year, respectively. This applies to anyone who has borrowed more than 100 million KRW from financial companies.

However, if the borrower's expected lifespan, retirement timing, and post-retirement income level clearly prove repayment ability, the maturity can be extended up to 50 years. Regarding this, an FSC official said, "This will apply to the age group eligible to use 50-year maturity products operated under policy loans," and added, "Banks can consider other repayment ability factors including retirement pensions." Currently, for special BoGeumJaRi loans, only those aged 34 or younger can use 50-year maturity mortgage loans.

The FSC also stated, "Banks must manage long-term loans with maturities of 40 to 50 years carefully to prevent excessive lending and speculative demand," and "They should also be cautious when handling loans in areas with high household debt expansion risks such as group loans, multi-homeowners, and living stabilization funds."

Loan Limits Lowered Further When Borrowing with Variable Interest Rates

If there is no effect in reducing household debt despite the restriction on 50-year maturity mortgage loans, another measure will be introduced. A stress DSR system will be implemented, which calculates DSR by considering the possibility of interest rate increases only for variable interest rate loans.

An FSC official explained, "Of course, the actual loan interest rate applied to the borrower is separate, but the intention is to reflect the possibility of future interest rate hikes." He added, "When calculating DSR, the highest interest rate compared to the past five years will be applied to determine the loan limit," and explained, "As a result, choosing a variable interest rate will lower the loan limit compared to fixed interest rates." This is a measure to reduce excessive interest burdens during periods of rising interest rates and to encourage fixed-rate loans.

For example, for a borrower with an income of 50 million KRW, when borrowing at an interest rate of 4.5% (applying DSR 40% and 50-year maturity), the loan limit is up to 400 million KRW. However, if the stress DSR system for variable interest rates is introduced with an additional 1 percentage point added to the interest rate, the limit decreases to 340 million KRW.

The financial authorities plan to review DSR regulation exceptions for NongHyup, SuHyup, and Industrial Bank of Korea. These banks have a 'DSR over 70% ratio management standard' of 15%, which is higher than the 7% for general banks, to support loans for small and medium enterprises, small business owners, and farmers. An FSC official said, "Although DSR regulations were relaxed as a benefit, it was confirmed that many loans to office workers were issued in these banks contrary to the original intent," and added, "The authorities will inspect and strengthen regulations if necessary."

General Type of Special BoGeumJaRi Loan to be Discontinued

As another measure to stabilize household loans, the general type of special BoGeumJaRi loan will be discontinued. As of the end of August, 89.4% (35.4 trillion KRW) of the supply target amount (39.6 trillion KRW) for special BoGeumJaRi loans had been disbursed. Especially, funds used for new home purchases were the largest, making it a major cause of recent household debt increases. Over the past seven months, 61.1% (21.6395 trillion KRW) of the total amount was used for home purchase loans. Accordingly, the FSC decided to focus the remaining 4.2 trillion KRW of the special BoGeumJaRi supply target on low-income and real demand groups only.

The FSC stated, "Applicants for the general type of special BoGeumJaRi loan and temporary two-homeowners who already own a house can apply for special BoGeumJaRi loans only until the 26th of this month." The general type targeted borrowers with a combined annual income of a couple exceeding 100 million KRW or homes priced between 600 million KRW and 900 million KRW. Temporary two-homeowners refer to borrowers who use new home purchase funds on the condition of disposing of their existing home within three years.

After the 27th, only the preferential type product, which applies to those with a combined annual income of a couple below 100 million KRW and housing price below 600 million KRW, will be available for special BoGeumJaRi loans. An FSC official explained, "Considering the limited support capacity of the Korea Housing Finance Corporation and the increasing household debt situation, it is inevitable to concentrate support on the groups that really need it."

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