Ever-Changing Household Loan Policies: Chaos in the Loan Market

Recent fluctuations in household loan policies have caused significant confusion for genuine loan seekers.

Recent fluctuations in household loan policies have caused significant confusion for genuine loan seekers. With new restrictions on loans for property owners and tighter controls on credit loans, the loan limits have drastically reduced, creating severe impacts for those in need of loans. This blog explores the recent changes in loan policies and the difficulties faced by genuine borrowers.

Recent changes in household loan policies by financial authorities have led to considerable confusion among genuine borrowers. Starting September 9, loans for property owners have been halted, and credit loans are being preemptively managed. Consequently, the loan limit for a couple with an annual income of 100 million KRW has decreased by 130 million KRW compared to September of last year.

KB Kookmin Bank and Woori Bank will restrict housing loans for property owners seeking to purchase additional properties in the metropolitan area starting September 9. Kookmin Bank will also limit credit loans to within the annual income range. Shinhan Bank will only allow housing loans for new purchases to households without properties and will restrict credit loan limits to annual income levels. Additionally, from September 13, the limit on overdraft accounts will be capped at 5 million KRW.

These restrictions have placed genuine borrowers, such as those needing to relocate due to children’s education, job changes, or divorce, in a difficult position. While financial authorities have urged banks to prepare measures for these genuine borrowers, the pressure to manage household debt remains strong. Commissioner Kim Byeong-hwan has mentioned the possibility of additional measures and emphasized that all options are on the table for expanding and solidifying the debt service ratio (DSR) and repayment capacity requirements.

Currently, the financial authorities are considering tightening credit loans further by applying a Loan-to-Income (LTI) ratio. The proposed regulation would limit credit loans to 100% of one's annual salary, down from the current 150% under DSR standards. Some proactive banks, such as Kookmin and Shinhan, have already started tightening credit loans.

Additionally, there is consideration of tightening credit card loans. Financial authorities are already assessing whether borrowers are shifting from high-interest card loans to secondary financial institution housing loans, a phenomenon known as the "balloon effect."

The situation is challenging enough with the current measures. Banks have already reduced the maximum term for housing loans from 40-50 years to 30 years and have stopped applying mortgage insurance (MCI/MCG) for new loans. The authorities have also introduced a second-stage stress DSR regulation this month.

With both financial authorities and banks applying "double pressure" on household loans, the lending environment has become extremely restrictive. For example, a simulation by a major bank showed that the loan limit for a person with an annual salary of 100 million KRW, under the second-stage stress DSR, decreased by 126 million KRW compared to August. Genuine borrowers are struggling to make up the difference, with some facing difficulties in securing funds for down payments.

The recent changes in household loan policies have plunged the loan market into chaos. Restrictions on loans for property owners and tightening of credit loan limits have created severe financial strains for genuine borrowers, exacerbating the loan cliff situation. There is an urgent need for effective measures to alleviate the impact on genuine borrowers as uncertainties about future regulations persist.