South Korea planned to tighten standard for household loans beginning 2018 by adopting a new debt-to-income (DTI) ratio, which includes the repayment of both principal and interest in the debt segment, the government said Tuesday.
The Ministry of Strategy and Finance, the Ministry of Land, Infrastructure and Transport and the Financial Services Commission jointly announced a set of measures to control massive household debts, saying the new DTI ratio will be introduced next year.
The current DTI ratio allows the only interest payment to be included in calculating the ratio. The new DTI ratio will be required to include the repayment of both principal and interest to tighten standard for new loans.
Under the Aug. 2 measure to control speculative investment in the real estate market, the DTI ratio ranges from 30 percent to 50 percent in Seoul and its suburban metropolitan areas. Outside the areas, the ratio is set at 60 percent.
The new regulations would make it more difficult for multiple-home owners to purchase more homes with borrowed money.
If a household buys a home with borrowed money, the DTI ratio usually surpasses 30 percent. In districts designated as speculation-ridden areas, the DTI ratio of 30 percent is applied.
Many of multiple-home owners here made speculative investment in the property market through a so-called gap investment.
Gap investment refers to an investment in a gap between home price and Jeonse, South Koreas unique home lease contract. As the Jeonse deposit nears home price, multiple-home owners more easily purchase new home with the Jeonse deposit.
Jeonse is a contract between two households where a landlord grants the resident right for two years to a tenant, who in turn lends a certain amount of money, or deposit, to the landlord.
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