"Expansion of DSR Application... Incentives for Fixed-Rate Household Loans Too"

Temporary Waiver of Prepayment Penalty Proposed to Help High-Interest Household Loan Borrowers Repay Early

The government has decided to consider expanding the scope of the Debt Service Ratio (DSR) application to manage household loans. Additionally, it plans to closely monitor the increase in household loans within the financial sector to prevent excessive growth and promote the expansion of long-term, fixed-rate mortgage loans.

On the 9th, officials were busy moving in the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where the financial authorities decided to include mortgage loans (Judaemdae) in the 'debt refinancing' infrastructure scheduled to be launched in May by the end of the year. The financial authorities explained that they aim to reduce the interest burden on mortgage loans by establishing a debt refinancing platform that allows users to compare loan interest rates across the financial sector at a glance and switch loans easily. Photo by Dongju Yoon doso7@

On the 8th, the Financial Services Commission held a 'Household Debt Status Review Meeting' chaired by Secretary-General Lee Se-hoon, with participants from the Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, Bank of Korea, Financial Supervisory Service, Korea Housing Finance Corporation, Korea Deposit Insurance Corporation, Korea Federation of Banks, and Korea Institute of Finance, where these matters were discussed.

At the meeting, attendees discussed the fact that household loans in the financial sector increased by 6.3 trillion won in October, marking the highest increase in 25 months since September 2021 (7.8 trillion won). Participants positively evaluated that although overall household loans increased due to factors such as growth in other loans, the increase in mortgage loans has gradually slowed down due to improvements in DSR calculation maturity and adjustments in the supply pace of policy mortgages.

However, to stabilize household loans, authorities decided to further strengthen household loan management. First, they agreed to solidify DSR regulations. To this end, they will closely examine the exceptions to DSR application and consider expanding the scope of DSR application within limits that do not exacerbate difficulties for vulnerable sectors. Detailed plans for the stress DSR currently under discussion are also scheduled to be announced next month.

A systematic incentive structure will be established to encourage banks to actively handle long-term, fixed-rate mortgage loans. Accordingly, authorities plan to reflect each bank’s fixed-rate loan performance in the deposit insurance premium differential evaluation supplementary indicators starting January next year, and implement the 'New Fixed-Rate and Installment Repayment Administrative Guidance,' which strengthens incentives for purely long-term, fixed-rate loans, from the first quarter of next year. Furthermore, incentives for covered bonds, which are used as a funding source for long-term, fixed-rate loans, will also be expanded.

To control the pace of household debt growth, authorities will closely monitor the increase in household loans within the financial sector. For banks, they will monitor the increase trends by loan category and purpose for each individual bank, and take specific measures such as consulting on management plans for banks with high household loan growth rates. For the secondary financial sector, they plan to closely monitor lending practices and pace through consultations by industry sector.

Measures to reduce the burden on borrowers will also be pursued. Authorities will actively consult with the financial sector on various measures, such as temporarily waiving prepayment penalties, to allow borrowers to repay loans when they wish or reduce repayment burdens through refinancing loans.

Secretary-General Lee stated, "Managing household debt is a task that is difficult to show results in the short term, so it is most important to have a long-term perspective and change the lending practices and behaviors of financial companies and users." He added, "We will make policy efforts to develop a sophisticated institutional incentive system so that the practice of borrowing with fixed-rate and installment repayment within the repayment capacity can take deep root in the financial field."

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