🚨 Seoul-Regional Household Loan Differentiation

Today Korean Economic News | 2025.01.05

📌 Seoul-Regional Household Loan Differentiation... Likely to Adjust Total Volume and Additional Interest Rates

💬 There are plans to differentiate household loan regulations between Seoul and regional areas by adjusting total loan volume and additional interest rates. Options being considered include adjusting regional loan volumes in banks' annual loan plans or adjusting additional interest rates when implementing the Stage 3 stress Debt Service Ratio (DSR). Discussions are underway on providing benefits by either imposing lower additional interest rates in regional areas or higher rates in the metropolitan area.

1️⃣ Easy to Understand

The government has announced plans to manage household loans differently in Seoul and regional areas. Simply put, they want to make borrowing money in Seoul a bit more difficult while making it a bit easier in regional areas.

For example, imagine two people with the same conditions applying for loans. A person living in Seoul might face higher interest rates or limited loan amounts. In contrast, a person living in a regional area might receive relatively lower interest rates or higher loan limits.

This differentiation policy is a strategy aimed at simultaneously achieving two goals: revitalizing regional housing markets and curbing overheating in the metropolitan area. It reflects an intention to disperse the population and capital concentrated in the metropolitan area to regional areas and promote balanced regional development.

2️⃣ Economic Terms

📕 Household Loans

Household loans refer to money borrowed by individuals or family units from banks or financial institutions.

• They are used for various purposes such as home purchases, living expenses, and education costs, and must be repaid with interest over a certain period.
• Typical household loans include mortgage loans, personal loans, and jeonse (key money deposit) loans.

📕 Total Amount Regulation

Total amount regulation is a policy that limits the total amount of loans that financial institutions can provide during a specific period.

• For example, restricting the amount that banks can lend to households this year to 100 trillion won.
• The purpose is to curb excessive household debt growth and maintain the stability of the financial system.

📕 Additional Interest Rate

An additional interest rate is an interest rate charged in addition to the base rate.

• It can vary depending on the borrower's creditworthiness, collateral value, loan purpose, and regional factors as in this policy.
• The higher the additional interest rate, the greater the total interest cost the borrower must bear.

📕 DSR (Debt Service Ratio)

DSR refers to the ratio of the cost of repaying the principal and interest of all loans relative to annual income.

• Simply put, it represents how much of one's annual earnings goes toward repaying debts.
• The higher the DSR, the greater the repayment burden on the borrower. Generally, financial institutions provide more loans to people with lower DSRs.

3️⃣ Principles and Economic Outlook

💡 Principle of Regional Differentiation

• The household loan differentiation policy is a tailored approach that considers different real estate market conditions by region. Seoul and the metropolitan area have relatively high housing prices and more speculative demand, while regional areas often have stagnant housing markets. Therefore, by strengthening loan regulations in the metropolitan area and relaxing them in regional areas, the aim is to resolve inter-regional imbalances.

💡 Household Debt Management and Market Stabilization

• This policy is a strategy aimed at killing two birds with one stone: effectively managing household debt while promoting stability in the real estate market. There has been criticism that loan regulations applied uniformly nationwide have failed to reflect regional characteristics. By implementing a differentiated approach with customized policies according to regional characteristics, the goal is to increase the efficiency of household debt management while simultaneously pursuing regional economic revitalization.

💡 Expected Effects and Outlook

• Experts anticipate that this policy will positively impact regional real estate markets. In particular, housing transactions in small and medium-sized regional cities that have been stagnant may increase, and there could be growth in the population considering relocation to regional areas. Conversely, in Seoul and metropolitan areas, housing price growth is expected to slow or stabilize due to strengthened loan regulations.

4️⃣ In Conclusion

The Seoul-regional household loan differentiation policy is a new approach that simultaneously pursues the dual goals of balanced regional development and real estate market stabilization. It embodies the intention to curb metropolitan overheating and revitalize regional economies through customized loan regulations tailored to regional characteristics.

However, for this policy to succeed, comprehensive support policies beyond simple loan regulation differentiation must be implemented, including job creation for regional economic revitalization and improvements in education and medical infrastructure. Additionally, it is important to continuously monitor the policy's effects and flexibly adjust according to market conditions.

Ultimately, the Seoul-regional household loan differentiation policy will serve as one puzzle piece within the bigger picture of balanced regional development. For this to manifest as a complete picture, synergy effects with various other policies will be crucial. Investors and home buyers need to monitor these policy changes and adjust their financial plans accordingly.