The Financial Services Commission held a meeting on household debt on June 27 with officials from related government ministries, industry groups, and housing loan and guarantee institutions.

At the meeting, officials discussed the expanding trend of household debt triggered by mortgage loans in the Seoul metropolitan area and announced a set of measures that will help to strengthen the management of household debt especially in the Seoul metropolitan area.

Household Loans

In recent months, the outstanding balance of household loans has been growing since April due to the rising volume of housing transactions in the wake of temporary lifting of the land transaction permit scheme in Seoul and expectation for rate cut, and this trend has continued into June.

With the rise in the volume of housing transactions in the Seoul metropolitan area, mortgage loans in this region has grown rapidly in particular.

Key Measures

I. Bolstering Total Management Target

Considering the economy’s nominal GDP growth forecast and the recent trend of household debt growth, the annual target volume of household loans—which include both financial companies’ own loan products and government-sponsored policy loans—will be revised down from the current level. For financial companies’ own loan products across all financial sectors, the total annual target volume will be reduced to 50 percent of the previous level effective from the second half of this year. For policy loans, the annual supply plan will be 25 percent less than the previously set level.

II. Applying Banks’ Self-regulatory Measures in All Other Financial Sectors

The implementation of self-regulatory household debt management measures taken up by banks on a voluntary basis will be expanded to all other financial sectors.

First, in the Seoul metropolitan area and/or speculation regulated zones, current homeowners (multiple-house owners or single-house owners without the intention to sell currently owned house) will not be allowed to purchase an additional house with mortgage loans (LTV ratio = zero percent), thereby cutting off demand of speculation. For single-house owners who plan to sell their currently owned property within six months, the loan-to-value (LTV) ratio of 70 percent in non-regulated zones and 50 percent in regulated zones will be applied, the same level of LTV rules currently in place for non-homeowers.

Second, the maximum level of mortgage loans one can take out for livelihood stability purposes will be capped at KRW100 million in the Seoul metropolitan area and/or speculation regulated zones. Multiple-house owners in these areas will be banned from taking out new mortgage loans for livelihood stability purposes. In the meantime, the maximum level of mortgage loans one can take out for livelihood stability purposes backed by properties in non-Seoul metropolitan areas can continue to be individually determined by financial companies.

Third, the maturity of mortgage loans in the Seoul metropolitan area and/or speculation regulated zones will be restricted to 30 years, thereby preventing regulatory circumvention regarding the debt service ratio (DSR) rules.

Fourth, in the Seoul metropolitan area and/or speculation regulated zones, the supply of jeonse loans that have a condition of ownership transfer will be prohibited, thereby preventing the use of loans for the speculative purpose of house flipping.

Lastly, the maximum limit on credit loans will be restricted within 100% of annual income of individual borrowers, thereby preventing the use of credit loans for purchasing houses.

III. Restricting Maximum Mortgage Limit on House Purchases

The maximum limit on mortgage loans financial companies can extent for house purchases in the Seoul metropolitan area and/or speculation regulated zones will be limited to KRW600 million, thereby preventing the use of excessive loans for purchasing highly priced homes.

IV. Strengthening Rules on Loan-to-Value and Other Regulations

First, first-time homebuyers in the Seoul metropolitan area and/or speculation regulated zones will be subject to the tightened LTV ratio (from 80 percent previously to 70 percent) and required to actually move into the newly purchased house within six months. These rules will equally apply to government-sponsored policy loans.

Second, the maximum limit on key policy loan products (“Didimdol loan” for purchasing houses and “Beotimmok loan” for jeonse contracts) will be adjusted down, thereby helping to redirect public sector housing funds more for supplying public housing units and providing assistance for lower-income households.

Third, when purchasing a new house with a mortgage loan in the Seoul metropolitan area and/or speculation regulated zones, the homebuyer will be required to actually move into the newly purchased house within six months, thereby encouraging the use of mortgage loans only for non-speculative purposes. This requirement will equally apply to policy loans (“Bogeumjari loan”)

Fourth, the guarantee ratio on jeonse loans in the Seoul metropolitan area and speculation regulated zones will be tightened to 80 percent from the current level of 90 percent, thereby encouraging financial companies to more rigorously conduct credit evaluation for jeonse loans.

Further Plan

The financial authorities plan to immediately implement these measures to minimize the potential of excessive demand concentration. The measure to tighten guarantee ratio on jeonse loans will also go into effect in a swift manner. For borrowers who have already signed their house purchase or jeonse lease agreements, or for those who have already completed their loan applications, the financial authorities will prepare interim measures to ensure the protection of borrowers’ interests and prevention of unforeseen damage to non-speculative borrowers.

In addition, with the banking sector’s self-regulatory household debt management measures being expanded to all other financial sectors, the financial authorities will guide financial companies to more effectively take into account the needs and interests of non-speculative borrowers, lower-income households, and vulnerable groups through operation of credit evaluation committees.

The financial authorities also plan to closely inspect and monitor financial companies for compliance and hold meetings with related organizations on a weekly basis to ensure a seamless implementation of these measures.

At today’s meeting, FSC Secretary General Kwon Dae-young emphasized the need to strengthen preemptive management over household debt and urged all financial sectors to promptly and rigorously adhere to the announced measures. While closely monitoring financial companies’ monthly and quarterly management targets and regional lending trends, Secretary General Kwon said that the financial authorities will be ready to immediately roll out additional measures if needed, for instance, to further strengthen the LTV ratio, expand the application of DSR to jeonse loans and policy loans, or tighten macroprudential regulations.

* Please refer to the attached PDF for details.