The FSC prepared plans for the normalization of regulation on household debt which contain the new administration’s household debt management strategies and a step-by-step normalization in lending regulations in support of housing ladder, as part of the new administration’s economic policy agenda announced on June 16.
New Administration’s Household Debt Management Plan
I. Stable Management of Household Debt Growth
The government will work to stably manage the growth of household debt so that a considerable expansion in household debt in the process of dealing with the COVID-19 pandemic does not impose burdens on the country’s economy and financial system.
- Prevent excessive expansion of household debt relative to income levels by promoting the practice of “borrowing based on one’s repayment capability (the debt service ratio rule) and making debt payments in installment.”
II. Step-by-step Normalization of Regulation on Housing Loans
The government will work to normalize the regulation on loan-to-value (LTV) ratio in a step-by-step manner in order to help ease difficulties faced by non-speculative homebuyers in the process of tightening control over household debt.
- Ease first-time homebuyers’ maximum LTV ratio to 80 percent.
- Normalization of rules on LTV ratios for homeowners (single property and multiple property owners) will be pursued after considering the implementation of the DSR rules and the household debt and real estate market situations.
While pursuing a gradual normalization in LTV ratios, the government will seek supplemental measures to help prevent DSR rules from restricting lending.
- Expand the level of future income that can be recognized in DSR calculation for young adults (51.6 percent for 20s and 17.7 percent for 30s).
- Improve lending regulation for living expenses in line with the implementation of the 3rd stage of individual borrower-level DSR regulation.
III. Protection of Vulnerable Borrowers amid Increasing Interest Rates
The government will work to ease the burden of debt payment for vulnerable borrowers as they may face the possibility of default in times of rising interest rates.
- Provide long-term fixed rate refinancing program for loan transfers (relief conversion loans). → KRW20 trillion plus KRW20 trillion
- Introduce a 50-year government-sponsored mortgage loan product and promote an incremental repayment method (for principal and interest) that starts with a small amount of debt payment but the amount grows in time.
Details of Key Measures
I. Expanding Implementation of Individual Borrower-level DSR Rule
a) (Overview) Allow issuance of new loans to the borrowers subject to the regulation whose individual DSRs are within the regulated level (40 percent for banks and 50 percent for nonbanks).
b) (Exemption for DSR Rule) Certain loan products are excluded from DSR calculation for the purpose of protecting lower income households and vulnerable groups.
II. Easing LTV Ratio to 80 Percent for First-time Homebuyers
a) Details: Apply maximum loan-to-value (LTV) ratio of 80 percent on first-time homebuyers regardless of the location or the price of home.
Limit the maximum loan amount to KRW600 million (currently KRW400 mil.) and consider increasing the maximum loan amount in the future after taking into consideration the household debt and real estate market situations.
For non-homeowners other than first-time homebuyers, application of the preferential treatment for LTV ratios currently applied to lower income households and non-speculative homebuyers will be in place.
b) Schedule: Revise the supervisory regulation on banking business and begin implementing in Q3 2022
III. Expanding Recognition of Young Adults’ Future Income in DSR Calculation
a) Background
Improve the DSR rule for young adults whose current income levels in DSR calculation lead to underestimation in their payment capabilities despite high potential income growth in the future.
b) Details
Make improvements to the guidelines already being observed in the financial industry to allow a more practical evaluation of one’s payment capability throughout one’s lifecycle.
- Improve the future income calculation method based on the age-specific income data made available on Statistics Korea’s employment and labor statistics to help reflect more realistic changes in income.
- Allow borrowers to choose the maturity deemed to be more favorable to them when calculating future income.※ Expand the maximum loan for the age groups that have high potential of growth in future income.
c) Schedule: Revise the financial industry’s best practice guidelines and begin implementing in Q3 2022.
IV. Improving Lending Regulation for Living Expenses
a) Background
Make certain improvements to the current regulation on lending for living expenses to help ease the financing condition for those in actual need of borrowing in line with the expanded implementation of the individual borrower-level DSR rule from July 2022.
b) Details
(1) Removing annual income-based cap for credit loan
(As of Now) The maximum credit loan amount is restricted within one’s annual income (through administrative guidance).
(To be Changed) While removing the annual income-based cap on credit loans, manage excessive borrowings in excess of income levels in a uniform way using individual borrower-level DSR regulation.
(2) Expanding loans for emergency living expenses not included in DSR calculation
(As of Now) For mortgage loans issued for emergency living expenses, up to KRW100 million can be excluded from DSR calculation when approved by individual lending institutions’ credit evaluation committees.
(Example for Improvement) Expand the maximum limit of mortgage loan for emergency living expenses that can be exempted from DSR calculation from the current level of KRW100 million to KRW150 million.
When the aforementioned improvements take place, it is necessary that financial institutions perform close screening of borrowers’ payment capabilities and abide by the principle of suitability when issuing loans.
c) Schedule: Removal of annual income-based cap for credit loan will take effect from July 1, and for expanding loans for emergency living expenses, the authorities will revise the supervisory regulation on banking business and begin implementing in Q3 2022.
V. Refinancing Program for Loan Transfers (Relief Conversion Loans)
a) Background
To provide support for reducing the principal and interest payment burdens of borrowers who are on variable interest rate mortgage loans and to remove the risk of additional interest rate hikes in the future.
b) Program Details
Provide a refinancing program that allows the current variable interest rate mortgage loans to be converted to long-term fixed rate mortgage loans through the securitization of mortgage-backed securities held by the Korea Housing Finance Corporation and offer additional reduction in interest rates.
- Provide KRW20 trillion in 2022 plus maximum KRW20 trillion in 2023
Eligible borrowers (with preferential condition) for the relief conversion loan program that is expected to be available in 2022
- (Eligibility) Variable interest rate home mortgage loans from the banking and non-banking sectors including mixed rate schemes which combine fixed and variable interest rates
- (Home Price) Market value of up to KRW400 million → Application and selection of eligible applicants to be made from lower-priced homes first
- (Income) Up to KRW70 million a year for married couple
- (Maximum Loan) Up to KRW250 million
- (Interest Rate) Fixed interest rate of up to 30bp lower than the interest rate of the government-sponsored mortgage loan (known as “Bogeumjari Loan”) at the time of loan issuance
c) Schedule (tentative): Application expected to open in September.
VI. Improving Korea Housing Finance Corporation’s Mortgage System
a) Details
(1) Apply maximum 80 percent LTV ratio (55~70% currently) for first-time homebuyers regardless of the location of the home or the type of the property (whether it is an apartment or not).
(2) Increase the loan limit through introduction of 50-year maturity mortgage
- Expand the maturity on government-sponsored mortgage loan products from the current 40 years to 50 years.(3) Reduce debt payment burdens of young adults by introducing incremental payment method
- Introduce the incremental payment method for 40-year government-sponsored mortgage loan for young adults and newly married couples to help alleviate their payment burdens at the beginning.
(4) Reduce fee burdens of mortgage users by lowering early payment fee rates on government-sponsored mortgage products by 25 percent from the current level of 1.2 percent (three-year sliding period) to 0.9 percent (three-year sliding period).
b) Schedule (tentative)
(July 2022) Lower fees on early payment and expand the application of incremental mortgage repayment method that starts from a small amount and then increases gradually.
(August 2022) Introduce 50-year maturity
(November 2022) Apply maximum 80 percent LTV ratio on home mortgages of first-time homebuyers* Please refer to the attached PDF for details.