Tightening Credit Limits: How New Regulations Affect Workers' Last Financial Lifeline

In response to rising household debt, financial authorities are considering measures to limit credit loan amounts to a percentage of annual income and lower the guarantee ratio for jeonse loans.

In response to rising household debt, financial authorities are considering measures to limit credit loan amounts to a percentage of annual income and lower the guarantee ratio for jeonse loans. This article explores how these potential regulations are expected to impact workers and their financial options.

1. Review of Credit Loan Limits

Financial authorities are examining the possibility of restricting credit loan limits to a certain percentage of annual income to manage household debt. This move comes as banks have intensified scrutiny of mortgage loans, potentially leading to a surge in credit loan applications—a phenomenon often referred to as the 'balloon effect.' There is speculation that credit loan limits might be capped at 100% of the borrower's annual income, reflecting similar regulations temporarily enforced in 2022.

Currently, under the Total Debt Service Ratio (DSR) of 40%, individuals can secure credit loans up to 180% of their annual income. However, with the introduction of an income-based loan-to-income ratio (LTI) regulation, credit loan limits may be adjusted to match the borrower's annual income.

2. Reduction in Jeonse Loan Guarantee Ratio

Financial authorities are also considering reducing the maximum guarantee ratio for jeonse loans from 100% to below 80%. Jeonse loans are supported by guarantee insurance that covers loan repayment, but the 100% guarantee has led to lax loan assessments by banks. Lowering the guarantee ratio is expected to tighten bank scrutiny and reduce loan issuance.

3. Surge in Credit Loans and Household Debt

Analysis of the top five banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) shows a decrease in credit loan balances in June and July of this year, followed by a sharp increase in August. Last month, these banks recorded the highest ever increases in household and mortgage loans. This surge is partly due to a rush to secure loans before the reduction in mortgage limits, fueled by rising real estate prices, particularly in Seoul.

4. Adjustments to DSR Ratios

Authorities are also considering measures to reduce the proportion of borrowers with high DSR ratios at individual banks. This would further tighten lending criteria and contribute to more effective management of household debt.

The potential tightening of credit loan limits and reduction in the jeonse loan guarantee ratio reflect significant shifts in financial regulations aimed at managing household debt. These measures are likely to affect workers' access to funds and necessitate careful financial planning to adapt to the new regulatory environment.