Restrictions on Mortgage Loans

New mortgage loans in property speculative zones are not allowed to those who have already made mortgage loans.

Under current loan-to-value (LTV) rules, mortgage loans are banned from exceeding 70 percent of the market value of homes provided as collateral for property loans. The LTV ratio is set to be reduced to 60 percent for apartments in property speculative zones at smaller mutual savings banks.

The Financial Supervisory Commission (FSC) and the Financial Supervisory Service (FSS) said on June 30 that in order to curb the overheating of the real estate market, they devised “Mortgage loan risk management measures of banks, insurance companies and mutual savings banks,” and those measures will go into force starting July 4.

Regulations on “Money” in the Property Market-

Under the new measures, anyone who received loans either in speculative zones or non-speculative zones is not granted new speculative loans.

As of June 30, speculative zones include 45 districts such as Gangnam, Seocho, and Songpa.

However, those who bought an apartment for moving and have yet to sell their existing residence are viewed as exceptions, temporary two-house owners, and they are allowed to get loans on the condition that they pay back the existing loan within a year. It they fail to repay within a year, they have to pay back a new loan.

Small business owners are also classified as exceptions and they are allowed to secure operating money by taking apartments in speculative zones as security for loan. There is no limit to the number of times they can take out loans.

In addition, the LTV will be decreased to 40 percent from the current 60 percent when it is applied to the case in which people, who own an apartment worth more than 600 million won in a speculative zone, take out loans with a date of maturity of more than ten years.

Many Loopholes, Questions about Effectiveness-

Financial supervisory authorities limit the subject of regulations to “the same person.” Therefore, those who take out loans in their spouses’ or children’s names can avoid regulations.

“Those measures seem ineffective because banks do not know how many times people make loans and where they spend the money,” a bank official said.

Moreover, demand for loans may concentrate on Nonghyup, Credit Union, and the Korean Federation of Community Credit Cooperatives because they are not subject to the regulations.

Accordingly, if the overheating of mortgage loans is not reined in, the FSC will review additional measures to limit the number of mortgage loans in speculative zones to one, not only for the same person but also for “the same household.”

Ji-Wan Cha cha@donga.com