Capital Region Mortgage Loan DSR Stress Interest Rate, 0.75%P→1.2%P... "Demand Suppression"

The financial authorities, ahead of the implementation of the second phase of the stress Debt Service Ratio (DSR) next month, will increase the stress interest rate applied to metropolitan area mortgage loans in the banking sector from 0.75 percentage points to 1.2 percentage points.

A meeting between Financial Services Commission Chairman Kim Byung-hwan and heads of major commercial banks was held on the 20th at the Seoul Banking Hall. Before the meeting, Chairman Kim and the attending bank presidents posed for a commemorative photo and then proceeded to their seats. Photo by Heo Young-han younghan@

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Below are questions and answers related to the implementation of the second phase stress DSR by the financial authorities.

Q. Why is the stress interest rate being increased for metropolitan area mortgage loans in banks?

A. Recently, household loans have been increasing mainly in bank mortgage loans. The stress interest rate will be prioritized for increase on metropolitan area mortgage loans in banks, which are currently leading the increase in household debt.

Q. What is the basis for adding 1.2 percentage points to the stress interest rate?

A. Considering the trend of declining market interest rates due to expectations of rate cuts after the implementation of the stress DSR, the rate was set at 1.2 percentage points. Market interest rates have significantly dropped since the end of last year, reflecting expectations of rate cuts in advance. Also, the recent continuous reduction of preferential mortgage loan rates by commercial banks under the pretext of managing household debt was taken into account. While raising loan interest rates can suppress loan demand, it also increases borrowers' interest burden. On the other hand, increasing the stress interest rate is expected to have a demand suppression effect without increasing the interest repayment burden.

Q. Is inconvenience to actual borrowers expected due to loan limit reductions from this stress interest rate increase?

A. Even with the increase in the stress interest rate, only borrowers with a DSR level of 37-40% (6.5% of metropolitan area mortgage loan borrowers in banks) are expected to be affected by some loan limit reductions. For fixed-rate (including mixed and periodic) mortgage loans, which account for the majority recently, only part of the stress interest rate is reflected, so inconvenience to actual borrowers is expected to be limited.

As with the first phase stress DSR implementation, transitional measures will be in place to minimize inconvenience to actual borrowers. For example, borrowers who signed housing sales contracts by the 31st of this month will be subject to the first phase stress interest rate (0.38%).

Q. What is the position on criticism that banks are raising additional interest rates in line with the financial authorities’ household debt management policy?

A. There have been criticisms that commercial banks are responding by reducing preferential mortgage loan rates or raising additional interest rates to manage household debt, so the interest rate trends for mortgage loans by each bank are being closely monitored.

The financial authorities expect that banks will manage household loans stably through strict repayment ability assessments and proactive risk management measures, and that the second phase stress DSR and management purpose DSR, which will be implemented from next month, will become risk management tools for the banks themselves.

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