The South Korean government will tighten mortgage lending regulations in the capital region starting in September, imposing stricter rules than those in non-capital areas. The move aims to curb rising housing prices in the Seoul metropolitan area by reducing loan limits more than in other regions.
On Aug. 19, government and financial industry sources reported that the Financial Services Commission (FSC), South Korea’s top financial regulator, will implement higher stress rates when determining loan limits in the capital region from Sept. 1 as part of the second phase of the Debt Service Ratio (DSR) rules. These rules ensure that a borrower’s annual debt payments do not exceed 40% of their income.
The DSR rules include a stress rate to account for potential future interest rate hikes that could increase repayment burdens. Higher interest rates mean lower loan limits for borrowers with the same income. Earlier this year, the government applied an additional stress rate of 0.3 to 0.4 percentage points nationwide. Starting in September, this rate will increase to 0.7 to 0.8 percentage points in non-capital areas and over 1 percentage point in the capital region. For example, a person with an annual income of 50 million won taking out a 40-year mortgage at a 4% interest rate can currently borrow about 377 million won. In September, loan limits would decrease by around 20 million won in non-capital areas and 45 million won in the capital region.
These stricter regulations respond to the sharp rise in housing prices in the capital area. On Aug. 19, KB Financial Group’s research center reported that Seoul’s housing prices in July rose by 0.42% compared to the previous month, significantly exceeding June’s 0.09% increase.
As of Aug. 14, household loans at the five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—stood at 719 trillion won, increasing by 4.18 trillion won in just the first half of the month. This surge has raised concerns that it could surpass last month’s 7.166 trillion won increase.
To address the rapid rise in household loans, the government has instructed financial institutions to assess the status of loans such as jeonse loans and policy loans, which were previously exempt from stressed DSR regulations. This review is seen as a step toward potential future regulatory tightening. A government official noted that this is part of efforts to be prepared to take action if the surge in loans does not slow down.
Additionally, the government is considering raising the risk weight for mortgage loans. Currently set at a minimum of 15%, the government is contemplating increasing it to over 20%, bringing it closer to the 30% minimum for corporate loans. A bank official cautioned that this change could negatively impact shareholder returns, such as dividends, and might reduce banks’ willingness to expand their loan portfolios.
