SEOUL, Nov. 27 (Korea Bizwire) — South Korea’s financial regulator said Sunday it will require first-tier banks to implement a stricter rule for mortgage lending in the fourth quarter of next year, in a fresh bid to better manage growing household debt.
Currently, people’s repayment ability for home mortgages is calculated on a ratio that measures home mortgage principal and interest payments as a proportion of their annual income.
The stricter lending rule for home mortgages, named the Debt Service Ratio (DSR) by the financial authorities, will use a new ratio that measures all debt principle and interest payments as a proportion of annual income.
Officials at the Financial Services Commission (FSC), the financial regulator, have said the DSR system will better assess a borrower’s repayment ability and reduce a potential default risk.
During the first quarter of next year, the top tier of banks will implement the DSR system on a trial basis, the FSC said in a statement.
Second-tier banks, such as savings banks and credit unions, will begin a trial operation of the DSR system during the third-quarter of next year, it said.
First-tier banks will begin implementing the stricter lending rule in the fourth quarter, the FSC said.
South Korea’s household debt pile has been cited as a key problem for the nation’s economy as it holds back private consumption.
Household debt stood at 1,419 trillion won (US$1,308 billion) at the end of September.