Banking Sector Tightens 'Maturity and Limits' Instead of Household Loan Interest Rates...Concerns Over Impact on Genuine Borrowers

Banks have begun restricting the maturity and limits of mortgage loans to control household debt. This move comes as the previous interest rate hikes alone have failed to curb real estate investment sentiment, and authorities have issued warnings against 'interest profiteering' amid the widening gap between deposit and loan interest rates. While regulators are considering adjusting the Loan-to-Value ratio (LTV) following the Debt Service Ratio (DSR), some express concerns that these limit reductions could harm young people or genuine homebuyers.

According to the financial sector on the 27th, KB Kookmin Bank will officially implement a comprehensive household debt management plan starting on the 29th, which includes restrictions on mortgage loan maturities and limits. This is an additional measure following previous interest rate hikes, the suspension of mortgage refinancing (switching loans), and halting mortgage loans for multi-homeowners.

First, to suppress speculative demand, the limit on living stabilization fund loans secured by houses not intended for purchase will be capped at a maximum of 100 million KRW. Additionally, the maximum loan period for home purchase loans in Seoul and the metropolitan area will be reduced from 40 years to 30 years. By simultaneously reducing loan limits and maturities, the bank aims to curb loan demand.

Moreover, Kookmin Bank will also stop handling land (bare land) secured loans, which could be used for speculative funds, and limit the maximum loan amount for new automatic overdraft credit loans to 50 million KRW. When applying for a mortgage loan, the bank will suspend mortgage insurance (MCI·MCG) subscriptions and prohibit setting grace periods.

Such loan restrictions are not unique to Kookmin Bank. Shinhan Bank also temporarily suspended conditional jeonse (key money deposit) loans, which have been criticized as a basis for so-called 'gap investments,' starting the day before. This suspension applies to conditional jeonse loans where ownership is transferred to the lessor (buyer) on the loan execution date. The aim is to control gap investments, where the balance is paid using the deposit from a new jeonse tenant while purchasing a house.

Shinhan Bank, like Kookmin Bank, will also stop handling Plus Mortgage Insurance (MCI·MCG). This means borrowers will have to bear additional small tenant deposit amounts (55 million KRW in Seoul, 48 million KRW in Gyeonggi, and 25 million KRW in other regions), effectively reducing loan limits. Other banks also plan to roll out similar household debt measures as Kookmin and Shinhan Banks.

The reason banks have taken these measures is that previous interest rate hikes failed to reduce loan demand. A banking sector official said, "Commercial banks raised mortgage loan rates by more than 1 percentage point through over twenty hikes, but many still took out loans, accepting the rising house prices," adding, "The delay in implementing the second phase of the stress DSR also contributed to continued demand for last-minute loans."

Consequently, the artificial increase in loan interest rates compared to market rates prompted authorities to intervene. Lee Bok-hyun, Governor of the Financial Supervisory Service, recently stated in an interview that the recent loan rate hikes were "not what the authorities wanted" and expressed a strong sense of the need for intervention.

Financial authorities are also showing signs of limiting loan amounts beyond interest rates. They plan to raise the stress interest rate applied in the metropolitan area from the current 0.75% by 45 basis points (1bp=0.01%) to 1.2%, and are considering including jeonse loans and policy mortgages in the DSR calculation. If demand does not decrease, they are also reportedly considering reducing the LTV. For example, if the LTV applied in Seoul and the metropolitan area is reduced from the current 50% to 40%, the loan amount for a 1 billion KRW house purchase would drop from 500 million KRW to 400 million KRW. This would be a drastic measure.

However, some in the financial sector remain skeptical of this trend, pointing out that real estate investment sentiment has not been dampened. There are concerns that restricting maturities and limits could also affect young people and genuine buyers, potentially repeating patterns seen during previous total loan volume regulations years ago.

A financial sector official said, "If investment sentiment does not subside, even if loan limits are restricted, various loopholes such as private transactions and secondary financial institutions will be used, and in the process, young people and genuine buyers may not receive the loans they need, leading to relative deprivation," adding, "Ironically, this could recreate the issues that occurred four to five years ago during the Moon Jae-in administration, when rapid house price increases and total loan volume regulations caused problems."

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