Confusion for Homebuyers: 'Losing 200 Million Won Due to New Regulations' Sparks Chaos

Financial Supervisory Service (FSS) Chairman's Comments Lead to Sudden Mortgage Loan Regulations by Banks, Disrupting Homebuyers' Plans

Financial Supervisory Service (FSS) Chairman's Comments Lead to Sudden Mortgage Loan Regulations by Banks, Disrupting Homebuyers' Plans

Choi, a worker set to marry next year, rushed to buy a home in early August due to skyrocketing real estate prices in Seoul. After seeing the prices rise daily, he moved quickly to secure a housing mortgage loan (home loan) of up to 500 million won from the bank for a 900 million won apartment. Concerned that the skyrocketing prices might jeopardize his purchase, he paid the deposit and interim payments of 200 million won ahead of schedule.

However, the situation changed dramatically when financial authorities, led by Financial Supervisory Service (FSS) Chairman Lee Bok-hyeon, criticized the recent interest rate hikes by banks. Following the criticism, banks began tightening loan conditions significantly by reducing loan periods or eliminating grace periods. Choi lamented, "I had planned for a 50-year repayment term, but now it's suddenly limited to 30 years, altering both my repayment plans and loan limits. If I can't come up with an additional 40 million won by the balance payment due in November, I risk losing the 200 million won I've already paid."

The sudden tightening of mortgage loans by banks, in response to pressure from financial authorities, has left homebuyers anxious. Chairman Lee publicly criticized the banks for raising interest rates, stating that it was not the intention of the authorities to manage household debt. Following this, banks began implementing stricter loan regulations, including reducing loan terms and limits.

As of September 27, 2024, the outstanding household loans at the four major banks (KB Kookmin, Shinhan, Hana, and Woori Banks) had reached 517.5 trillion won, exceeding their year-end target of 512.7 trillion won. Park Chung-hyun, Deputy Director of the FSS, noted that August saw an increase in loan amounts compared to July, indicating the need for regulatory intervention.

Homebuyers who signed purchase contracts between July and August are facing significant challenges due to these new regulations. The introduction of the debt service ratio (DSR) Stage 2 regulations on September 1, along with additional bank-specific restrictions, has resulted in lower loan amounts than initially planned.

For instance, if an employee with an annual salary of 70 million won takes out a 500 million won mortgage loan with a 50-year repayment term (interest rate of 4%, adjustable-rate, equal principal and interest payments), the current DSR is 33%. Under the strengthened DSR Stage 2 regulations, this will rise to 35%. If the loan term is shortened to 30 years, the DSR increases to 42.8%, making the loan unfeasible. The loan limit for a 30-year term also drops to 460 million won, requiring an additional 40 million won. Moreover, monthly payments for a 50-year loan would be 1.92 million won, but for a 30-year loan, it would jump to 2.39 million won.

Borrowers are now scrambling to find alternative options. They are checking with regional banks and insurance companies, which are often considered secondary financial institutions, to see if they can still secure loans. In fact, inquiries about loan possibilities before regulations are expanded and the feasibility of 50-year loans at regional banks are flooding real estate communities.

The problem is that these financial institutions might also face restrictions. A representative from a regional bank mentioned, "While our rates are lower than those of major banks and we haven't announced any new loan restrictions, we are still a regulated industry. We can't openly expand household loans."

The recent regulatory changes and sudden tightening of loan conditions by banks have created significant uncertainty and challenges for homebuyers. As financial authorities continue to impose stricter regulations, borrowers must navigate a complex landscape to secure their home financing and avoid potential financial losses.