[Exclusive] Small Loans and Jeonse Loans for Non-Homeowners Excluded from Additional DSR Regulation... Loans of 100 Million Won or Less Left Out

The government plans to exclude small loans of 100 million won or less and high-value jeonse loans for those without homes from the additional Total Debt Service Ratio (DSR) regulations currently under consideration to manage household lending. The aim is to strictly control so-called “speculative loans” that, when combined with investment demand, could stimulate housing prices, while preventing excessive barriers to borrowing for low-income households and genuine jeonse tenants.

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On April 16, a financial authority official stated, “If DSR regulations are applied even to loans of 100 million won or less, access to funds for low-income households could deteriorate significantly. Therefore, the upcoming lending regulation measures will not include DSR application for small loans. There is also little need to rush the introduction.”

DSR is an indicator that limits the loan amount within the borrower’s repayment capacity by calculating the ratio of annual loan principal and interest repayments to the borrower's income. Currently, DSR regulations are only applied when the total loan amount exceeds 100 million won, so small loans have essentially been a regulatory blind spot. For this reason, financial authorities had considered reflecting the principal and interest of small loans in the DSR calculation, but, in light of concerns that this could excessively limit the borrowing capacity of low-income and vulnerable borrowers, the upcoming regulatory plan will not include this measure.

The financial authorities are also leaning toward not applying DSR regulations to high-value jeonse loans for those without homes, which had previously been under review. Currently, repayment of interest on jeonse loans by single-homeowners-those who lease out their own home and rent another-are reflected in the DSR. There had been discussion about expanding DSR regulations to include high-value jeonse loans for non-homeowners as well. However, including interest on jeonse loans for non-homeowners in the DSR calculation could prompt backlash from tenants and accelerate the shift from jeonse to monthly rentals, thereby increasing instability in the rental market.

However, the financial authorities are considering strengthening capital regulations on “high-risk mortgage loans,” such as high-DSR or high-value mortgage loans. The key measure is to raise the Risk-Weighted Asset (RWA) ratio for mortgages. Applying additional RWA to high-value mortgage loans would impose a greater capital burden on banks. When the RWA increases, even if banks issue the same amount of mortgages, their Common Equity Tier 1 (CET1) ratio declines, which may prompt banks to reduce their lending. Although this is not a direct lending regulation, it would indirectly suppress lending.

The criteria for high-value mortgage loans are being discussed at a level above the banking sector’s average mortgage loan of approximately 250 million won. Another measure under review is to determine the level of risk by focusing on excessive leverage relative to house prices using the Loan-to-Value (LTV) ratio. The financial authorities raised the lower limit for RWA on new mortgage loans from 15% to 20% last year and are now considering further increases, with an additional “penalty” planned for high-risk mortgage loans. As this year’s target for the household loan growth rate across the financial sector is set at 1.5%, lower than last year’s 1.7%, such regulatory tightening is seen as a means to manage the total volume of household lending.

Yonhap News

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The government is now focusing its upcoming lending regulations on “speculative non-owner-occupied single-homeowners” and is speeding up the preparation of relevant measures. The Financial Services Commission is currently operating three working groups in parallel, addressing non-owner-occupied single-homeowners, DSR, and RWA regulation enhancements. The main policy focus is on tightening loan regulations for non-owner-occupied single-homeowners. This follows President Lee Jaemyung’s repeated calls for stronger lending regulations on speculative non-owner-occupied single-homeowners, following previous measures targeting multi-homeowners.

The Financial Services Commission is currently focusing on establishing criteria for identifying “speculative” demand. Given the diversity of reasons-such as education, employment, or supporting parents-a careful review is underway regarding the criteria for determining speculation and the scope of exceptions to be allowed. As the regulatory front is being extended from multi-homeowners to even single-homeowners, there are concerns that if these “targeted regulations” are not implemented with precision, stronger-than-expected market backlash and negative side effects could result. Rather than rushing to announce lending regulation policies, the government plans to thoroughly examine the regulatory impact and market effects before introducing measures, as early as next month, that can precisely filter out only speculative demand.

Once the standards are finalized, the government plans to mobilize all available policy tools in response. The authorities believe that the use of jeonse loans as leverage to purchase homes has fueled sequential moves to higher-tier areas and put upward pressure on prices. If demand is deemed speculative, measures under consideration include restricting access to jeonse loans. Leveraging jeonse loans and other forms of leverage for “gap investing” in expensive homes is considered abnormal speculation and will be blocked accordingly.

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A financial authority official stated, “To put an end to ruinous real estate speculation, we will establish lending regulations for non-owner-occupied single-homeowners with speculative characteristics. We will comprehensively review all financial tools-including mortgage loans, jeonse loans, credit loans, and living stabilization loans-to find the optimal regulatory combination.” He added, “The April 1 measures are just the beginning. Various policy tools are being prepared to stabilize the real estate market.”

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