Household Debt Rising Again... Minimizing DSR Regulation Exceptions for Jeonse Loans Needed

"'The Principle of Loans Within Repayment Capacity Must Be Established'"

As domestic household debt has turned to an increasing trend again, maintaining the highest level of ratio to the economic scale (nominal GDP) in the world, a suggestion has been made that exceptions to the calculation of borrower-specific total debt service ratio (DSR) regulations, such as for jeonse deposit loans, should be minimized to strengthen macroprudential management.

On the 15th, Shin Yongsang, a senior research fellow at the Korea Institute of Finance, stated this in a report titled "Household Debt Increasing Again, Suggestions for Future Management Directions."

According to the report, domestic household debt shows an expansion of borrower default risk and concerns about deterioration in macroprudential soundness. Expectations of rising housing prices are forming amid higher interest rates, leading to an increase in household debt again. Furthermore, the possibility of a prolonged high-interest rate environment is high, and the proportion of variable-rate loans is also significant.

According to the Institute of International Finance (IIF), as of the end of the second quarter, South Korea's household debt to GDP ratio was 101.7%, ranking fourth after Switzerland, Australia, and Canada. This is more than 40 percentage points higher than the global average of 61.9%.

Senior Research Fellow Shin explained that to manage household debt, monetary authorities need to strengthen market warnings through continuous preemptive guidance on the possibility of prolonged high interest rates, emphasizing that "for the time being, home purchases and risky asset investments are not attractive from a profitability perspective."

He added that from a macroprudential perspective, regulatory environments should also be supplemented, including ▲ setting household debt maturity structures reflecting life-cycle expected income flows ▲ specifying plans to introduce countercyclical capital buffers ▲ applying conservative maturity structures and interest rates for each loan product when calculating DSR ▲ expanding the proportion of equity investment by rental business operators. In particular, he emphasized, "To establish the original purpose of the borrower-specific DSR system, which is the principle of 'loans within repayment capacity,' exceptions should be minimized, and a dual approach using other regulatory tools such as loan-to-value ratio (LTV) should be considered to support housing for low-income households." He added, "Through this, indirect routes and risks of household loans can be preemptively blocked, and the complex, differentiated loan regulations by the number of houses, housing prices, and regions can be simplified based on debt repayment capacity standards."

He also stated, "In particular, it is necessary to consider gradually reflecting the principal repayment amount of jeonse deposit loans in the landlord's DSR through appropriate maturity calculations," adding, "However, measures should also be prepared to prevent landlords from excluding tenants who have taken jeonse deposit loans when signing lease contracts."

Additionally, from the perspective of soundness management, he mentioned the need to conservatively apply the maturity structure and interest rates of each loan product used in calculating the DSR repayment principal and interest so that borrowers can accurately reflect the risks of their own loans.

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