South Korea to speed up enforcement of tougher income-based lending rules to curb household debt

SEOUL, Oct. 26 (Yonhap) – South Korea on Tuesday announced it will apply stricter lending rules based on borrowers’ ability to repay earlier than originally scheduled to curb the surge household debt which has become one of the most serious potential risks to the economy.

Home rental loans, however, will not be subject to stricter government lending rules until the end of this year as part of efforts to provide credit to those who actually need to borrow.

These are part of a series of measures the government announced on Tuesday to contain skyrocketing household debt and prevent it from weighing on the country’s overall economic recovery from the fallout from the coronavirus pandemic.

“Given the scale and growth, household debt has recently emerged as the biggest potential risk that could threaten our economy,” the Financial Services Commission (FSC) said in a press release.

“We will improve the actual efficiency of the DSR system so that repayment capacity based lending practices can spread and take root earlier,” added the FSC.

The debt service ratio (DSR) measures how much a borrower has to pay for principal and interest as a proportion of their annual income, which serves as a ceiling for all loans.

As of July, the FSC has applied a 40% DSR to borrowers who purchase a home worth more than 600 million won ($ 512,000) in regulated areas.

The financial regulator plans to extend the application of the rules in the coming years in two stages under which they will also be applied to borrowers with outstanding loans exceeding 200 million won in July next year and to those with more than 100 million won outstanding loans as of July 2022.

The regulator said it would advance the timeline for the application by starting the expansion of the first stage in January of next year and the application of the second stage in July of the same year.

The current 60% DSR applied to non-bank loans will also be tightened to 50% in January next year, resulting in reduced lending to those looking to borrow, the FSC said.

The tightened rules, however, will not be imposed on “jeonse” loans for the rental of housing taken out in the fourth quarter of this year, the FSC said, amid complaints that such restrictions have made it more difficult to borrowing money to find accommodation. .

Under South Korea’s decades-old jeonse system, tenants pay the landlord a large lump sum deposit, known as key money, which is then returned at the end of the rental agreement, which usually lasts two years. During the term of the lease, tenants do not pay monthly rent.

President Moon Jae-in previously ordered his staff to closely monitor banks to ensure a steady supply of loans for rental housing in jeonse.

Tuesday’s measures were the latest in a series of measures the government unveiled to curb household debt, which has grown at a faster pace since 2020 as part of national efforts to boost the economy against the pandemic of coronavirus.

Household debt rose 7.9% year-on-year in 2020, a faster rate of growth than a 4.1% increase the year before. Debt grew 10.3% year-over-year in the second quarter of this year.

Although household debt growth has slowed slightly since September following the tightening of government lending rules and the impact of the Bank of Korea’s rate hike in August, upward pressure remains high. in a context of strong demand for loans due to soaring house prices and rents.

The central bank recently kept its policy rate unchanged at 0.75% for October, but hinted at the possibility of another rate hike next month amid concerns over rising inflation and debt Household.

The FSC has said it will work to keep the growth rate of household debt within a 5-6% range for this year and lower it to a 4-5% range for next year. , pre-coronavirus levels.

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