Additional borrowing by multiple home owners and beyond affordability will become more or less impossible from next year under a new set of measures the Korean government released Tuesday as a part of efforts to rein in ballooning household debt amid expectations of interest rates going higher.
According to comprehensive measures jointly announced by the Ministry of Strategy and Finance, the Ministry of Land, Infrastructure, and Transport, and the Financial Services Commission on Tuesday, the government will tighten mortgage rules by revising the debt-to-income (DTI) ratio measurement to better reflect the actual income when licensing new loans.
Lee Chan-woo, deputy finance minister, said that once the new DTI ratio is in place starting next year, it would be difficult to profiteer through the so-called gap investment.
Gap investment refers to investors buying apartments that are under jeonse or long-term lease contract at a lower price from the landlord so that they can make profit if the housing price jumps.
The current DTI ratio includes the principal of a new home as well as interest payment of existing homes while the new DTI ratio also includes the principal of loans in existing homes in calculating loan limits. This would make it almost impossible for multiple homeowners to receive additional loans.
The government’s latest measures also include limiting maturity of additional loans taken out by multiple homeowners to 15 years.
Based on the government’s real estate measures announced in August, a borrower with one mortgage to pay back cannot receive additional mortgage loans in speculative districts in Seoul and Sejong City. In other 14 districts in Seoul and Gwacheon City, the DTI ratio is limited to 30 percent while 40 to 50 percent depending on the areas. In other places, a 60 percent loan-to-value rate is applied.
The government will deliberate later whether to expand DTI rule to other parts of the country.
Meanwhile, the latest measures also include lenders adopting debt service ratio (DSR) from the second half next year, earlier than initially planned. Under DSR, a lender would reflect an index that divides principal payments of not only mortgage loans but also credit-based loans by income when calculating the amount of loans that can be taken out by a borrower.
The government aims to lower current household debt that has reached 1,400 trillion won ($1.2 trillion) by 0.5 to 1 percentage point to contain average annual gains with 8.2 percent - the annual increase from 2005 to 2014. It hopes to bring down household debt balance to around 1,450 trillion won to 1,460 trillion won by the end of the year.
By Chung Seok-woo, Kim Se-woong, and Lee Eun-joo
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