S. Korean government tightens lending rules to curb capital-area debt

Third phase of DSR policy targets mortgages, credit loans in Seoul, Gyeonggi and Incheon

South Korea is set to impose tougher lending limits on household debt in the capital region starting in July, expanding its debt service ratio regulations to curb soaring real estate borrowing fueled by low interest rates and eased property rules. /Graphic by Song Yoon-hye

The South Korean government on May 20 unveiled a third-phase plan to tighten DSR—or debt service ratio—regulations, aiming to curb the rapid growth of household lending in the Seoul metropolitan area.

The new measures, set to take effect in July, will apply to all real estate-backed loans issued by financial institutions in Seoul, Gyeonggi-do, and Incheon, placing no exceptions for non-residential properties such as land or commercial buildings.

In addition, the government will expand lending restrictions to include various non-mortgage loans, such as credit card loans with long maturities, loans secured by deposits, and other forms of personal credit.

Officials say the move was prompted by a noticeable uptick in household borrowing this year, particularly in the capital region, following the lifting of land transaction permit zones in Seoul’s Gangnam district.

Household loans across all financial institutions rose by 5.3 trillion won (about $3.8 billion) in April, and the increase for May is expected to reach $4.32 billion, according to estimates.

Kwon Dae-young, secretary general at the Financial Services Commission (FSC), said the new framework will apply a “stress interest rate” to virtually all household loans in all sectors, thereby helping to limit borrowing even in a low interest rate environment.

The DSR, or debt service ratio, refers to the percentage obtained by dividing the total annual principal and interest payments on all loans by a borrower’s annual income. Currently, bank-issued loans are subject to a 40% DSR cap.

In February 2023, the S. Korean government implemented the first phase of DSR regulations by applying a 0.38% stress interest rate to mortgage loans issued by banks.

A stress interest rate is a hypothetical rate used only when calculating loan limits—it does not affect the actual rate paid by the borrower. The higher the stress rate, the lower the amount a borrower can take out.

In September, the government launched the second phase by raising the stress rate to 1.2% for mortgage loans in the capital region. For bank loans in non-capital areas and for mortgages issued by second-tier lenders such as savings banks, a 0.75% rate was applied.

The newly announced third-phase plan goes further. Starting in July, a 1.5% stress interest rate will be imposed on all credit loans and other non-mortgage loans across all financial sectors. This marks the most stringent version of the DSR framework to date.

For example, a borrower earning $5 million a year, assuming no other debts and a 30-year variable-rate mortgage at 4.2%, would see their loan limit fall from $30 million to $29 million.

A borrower earning $10 million would see their limit reduced from $59 million to $57 million.

The government also plans to revise how stress interest rates are applied to hybrid and periodic-rate mortgages to encourage fixed-rate lending.

The government also plans to increase the portion of the stress interest rate applied to certain types of loans that combine fixed and variable interest periods.

For example, hybrid mortgages with a fixed rate for five years followed by adjustments every six months, as well as periodic-rate mortgages that reset every five years, will both see their applicable stress rate portion rise by 20 percentage points compared to current levels.

Currently, for a 30-year mortgage with a fixed-rate period of five to nine years—covering less than 30% of the total term—60% of the base stress rate (e.g. 1.2%) is applied, resulting in an effective rate of 0.72%.

Starting in July, this ratio will increase to 80%. This means that for borrowers with a fixed-rate period of five to nine years, the stress interest rate will rise to 1.2%—which is 80% of the 1.5% base rate—further reducing their loan limits.

However, if the fixed-rate period accounts for more than 70% of the total loan term, no stress interest rate will be applied.

Meanwhile, the stress interest rate for real estate loans in non-capital regions will remain at 0.75% through the end of the year. This means that loan limits for borrowers in these areas will stay the same.

The government said the move reflects the sluggish property market outside the capital. For example, a borrower earning $5 million a year can still borrow up to $31 million when using non-capital real estate as collateral.