Gov`t to Further Regulate Mortgage Loans Around Capital

Financial authorities are considering setting limits on mortgage loans based on a borrower’s income in the Seoul metropolitan region. Regulations on the debt-to-income ratio are applied to three southern districts in the capital.

A government official said yesterday that the government will decide whether to expand the regulation’s geographical reach after next month instead of implementing additional rules on the real estate market. Since housing prices are showing signs of a sharp rebound, the official said financial regulatory measures can be introduced without prior notice.

The mortgage loans of domestic households have reached a combined 341 trillion won (273.8 billion U.S. dollars) this month, up 1.2 percent from last month. Mortgage loans have increased every month since January. Though the rise has slowed slightly this month, the government says demand for the loans remains excessively high considering that August is a slow month for property deals.

Saying a higher volume of mortgage loans push up property prices, financial authorities are coordinating the planned expansion of the debt-to-income ratio rules with other ministries.

Experts say authorities will expand the ratio for the three southern Seoul districts or to areas where property prices are rising sharply. The government, however, will significantly expand the regulation due to fears over the “balloon effect,” in which property prices in neighboring areas surge as a result of regulation in one area.

To apply the regulation, the Strategy and Finance Ministry must declare an area a “highly speculative zone.” This time, however, financial authorities will likely try to control mortgage loans by recommending that banks reflect the debt-to-income ratio and standards to their internal loan regulations. They say simply designating “highly speculative zones” could have a limited preemptive impact.

Once expanded, the regulation will significantly reduce the maximum amount of mortgage loans that households can take. For instance, a person with an annual income of 50 million won (40,144 U.S. dollars) can borrow up to 563 million won (452,426 dollars) under a 20-year loan on the condition of repayment of principal and interest equally divided. If a ratio of 40 percent is applied, the amount will fall to under 200 million won (160,720 dollars).

Lowering the loan-to-value ratio had been considered before the decision to implement the debt-to-income regulation was made. An official said, however, that both measures could be taken simultaneously this month to maximize the regulation’s impact.

legman@donga.com