The Financial Services Commission held a meeting to discuss the current household debt situation with officials from the relevant government ministries and organizations on September 13 and announced a set of measures aimed at strengthening management of household debt growth.
With the volume of housing transactions recovering in July-August, the balance of household debt also continued to expand, led by mortgage loans in the banking sector. Especially, in July-August, the heightened competition between banks to introduce 50-year mortgage loans, in effect, pushed up the growth pattern. Under the current situation, 50-year mortgage loans can be utilized to circumvent the debt service ratio (DSR) rule by borrowers, and excessive lending or speculation in the property sector can potentially exacerbate the risk of household debt. As such, the authorities at the meeting agreed on the need to more closely manage and avert potential risks from long-term mortgage loans. Moreover, with regard to the issuance of special Bogeumjari loan, the pace of application has largely declined with upward adjustment of interest rates taking place in July-August. On special Bogeumjari loan, the authorities shared the same view that the availability of policy lending support through the remaining capacity of special Bogeumjari loan should focus on lower income households and non-speculative homebuyers.
Strengthening Management of Household Lending in Banking Sector
The government plans to take prompt measures to ensure that long-term mortgage loans (with 40-yr or 50-yr maturity) are not being utilized as a means of bypassing loan regulations. The authorities will ensure that banks are strictly following the principle of lending within the borrower’s repayment capability and strengthen rules on debt service ratio (DSR) to prevent banks from engaging in loose management of household loan issuance, especially in their handling of 50-year mortgage loans. To this end, first, the authorities will introduce two-step measures on long-term mortgage loans to ensure strict compliance with the principle of lending within the borrower’s repayment capability. In this regard, starting from today, if a borrower’s repayment capability is difficult to be verified throughout the entire loan period, the borrower’s DSR will be calculated for up to 40 years. On an individual case-by-case basis, only when the borrower’s repayment capability is clearly verified, lenders will be able to apply a 50-year maturity, for instance, for calculating borrower’s DSR. In addition, banks will have to strengthen household loan management on their own to ensure prevention of excessive lending or speculation in the property market and practice caution in their handling of riskier loan items, such as group loans for new apartment subscription, loans for multiple house owners and those for living expenses. While monitoring the effects of these first-step measures, the authorities plan to work on establishing rules on setting loan maturities for the entire household sector. The authorities will work with the banking sector to prepare a specific standard for setting the payment amount and period within the borrower’s actual payment capability, taking into account his or her future income projections.
Second, the authorities will seek to improve regulations to strengthen both quantitative and qualitative management of household debt. On variable interest rate loans, considering the possibility of interest rate hikes in the future, a stressed DSR limit will be used to more strictly apply DSR regulations. Moreover, the authorities will inspect whether the higher-than-ordinary DSR lending exception granted to specialized banks, which have issued large volumes of 50-year mortgage loans through group lending, are being observed appropriately.
Third, the Financial Supervisory Service will closely look into the banks that have issued large volumes of household loans and seek improvement measures if deemed necessary.
Tightening Special Bogeumjari Loan’s Eligibility Criteria
The remaining lending capacity of special Bogeumjari loan will be focused on making policy lending support available for lower income households and non-speculative homebuyers. For this, starting from September 27, the scope of eligibility criteria will be tightened to discontinue accepting applications (a) from those whose combined annual income (for married couples) is more than KRW100 million or those who are purchasing homes priced in excess of KRW600 million (and up to KRW900 million) and (b) from current homeowners owning one home with plans to sell their current properties within three years. In the meantime, the “preferential type” special Bogeumjari loans for those whose combined annual income is up to KRW100 million and who are purchasing homes priced at or below KRW600 million will continue to be available to provide support for lower income households and non-speculative homebuyers.
At the meeting, FSC Secretary General Lee Se-hoon spoke about the importance of strictly observing the principle of lending within the borrower’s repayment capability to ensure effective management of household debt. In this regard, Secretary General Lee urged close cooperation from the banking sector and said that the authorities will work to improve and prepare relevant rules.
* Please refer to the attached file for details.