🚨 Household Debt Growth Expected to Slow in Second Half: Continued Regulation and Monitoring

Today Korean Economic News | 2025.05.21

📌 Bank of Korea Announces Q1 Household Credit Preliminary Figures... "Debt Growth Expected to Continue Slowing Due to DSR Regulation Effects"

💬 The Bank of Korea announced that household debt growth is expected to slow in the second half of 2025 based on preliminary household credit figures for the first quarter. This is due to strengthened financial regulations, including the implementation of Phase 3 stress DSR. However, the bank noted that continued monitoring is necessary as domestic and international uncertainties and monetary easing trends could affect the real estate market.

1️⃣ Easy to Understand

Household debt refers to money borrowed by households or individuals. Recently, the government has strengthened loan regulations to prevent household debt from growing too quickly, and these measures are showing positive effects.

According to data released by the Bank of Korea, the growth rate of household credit (household loans + sales credit) in the first quarter (January-March) of this year was 3.1% compared to the same period last year, lower than the fourth quarter of last year (3.5%). This is the first time in 2025 that the growth rate has slowed.

In particular, the growth of mortgage loans has significantly decreased, largely due to the "Phase 3 stress DSR" implemented by financial authorities. Stress DSR is a regulation that checks whether borrowers can repay their loans even if interest rates rise by 3 percentage points. As this regulation was expanded to the entire financial sector from January this year, it has become more difficult to get loans.

The Bank of Korea expects this trend of slowing debt growth to continue in the second half of the year. However, they emphasized that continued monitoring is necessary as global economic uncertainties and the possibility of domestic interest rate cuts could affect the real estate market.

If household debt becomes too high, it can endanger not only individuals but the entire national economy. If the economic situation worsens and income decreases or interest rates rise significantly, the number of households unable to repay their debts could increase. Therefore, financial authorities are working to manage household debt at an appropriate level.

2️⃣ Economic Terms

📕 Household Credit

Household credit is the sum of loans borrowed from financial institutions and credit purchases such as credit cards.

• It consists of household loans (mortgages, personal loans, etc.) and sales credit (credit cards, installment financing, etc.).
• The Bank of Korea releases statistics every quarter.
• If household debt growth rate is faster than income growth rate, it can be seen as a warning sign.

📕 DSR (Debt Service Ratio)

DSR stands for Debt Service Ratio, which is the annual principal and interest payments on all loans divided by annual income.

• It adds up principal and interest payments for all loans (mortgages, personal loans, car loans, etc.).
• Generally, if DSR exceeds 40%, the debt repayment burden is considered high.
• Regulations have been strengthened gradually since 2022, and now DSR is applied to all loans.

📕 Stress DSR

Stress DSR is calculated by assuming interest rates rise by a certain level (usually 3 percentage points).

• It evaluates whether borrowers can repay their loans even if interest rates increase by 3 percentage points.
• Phase 3 was expanded to all financial sectors from January 2025.
• It aims to manage household debt risk in advance, preparing for interest rate increases.

📕 LTV (Loan to Value ratio)

LTV refers to the ratio of loan amount compared to the home price.

• For example, if you borrow 300 million won for a 500 million won house, the LTV is 60%.
• The government strengthens or relaxes LTV regulations depending on real estate market conditions.
• Currently, the LTV limit in most areas is 70%, with lower limits in speculative zones.

3️⃣ Principles and Economic Outlook

✅ Causes and Risks of Household Debt Growth

• Let's look at the main causes and risks of increasing household debt in Korea.

  • First, rising real estate prices and the desire to own homes are major causes of household debt growth. Housing prices have risen significantly in recent years, leading to a surge in loan demand for home purchases. In particular, apartment price increases in Seoul and metropolitan areas have led to growth in mortgage loans. The low interest rate environment after 2020 due to COVID-19 also affected loan growth. As interest rates fell, borrowing costs decreased, leading more people to take out loans. Additionally, "gap investment" demand due to rising jeonse (long-term rental deposit) prices and loans for asset investments such as stocks have contributed to household debt growth.

  • Second, excessive household debt can pose risks to individuals and the entire economy. From an individual perspective, when principal and interest repayment burdens increase relative to income, consumption capacity decreases and quality of life declines. Especially when interest rates rise, variable-rate borrowers may face sudden increases in repayment burdens, causing financial difficulties. For the overall economy, reduced household consumption capacity can lead to domestic economic stagnation. Also, if debt repayment ability deteriorates, financial institutions' bad loans may increase, risking instability in the entire financial system. According to Bank of Korea research, when the household debt ratio exceeds a certain level, it negatively impacts economic growth.

  • Third, if household debt growth rate is faster than income growth rate, household financial soundness deteriorates. Korea's household debt is about 105% of GDP, a high level among OECD countries. The problem is the rapid rate of debt increase - in recent years, household debt growth has exceeded income growth. This means households' debt repayment ability is gradually weakening. In particular, debt among economically vulnerable groups such as the elderly, low-income households, and self-employed is increasing, raising the possibility of their debt repayment problems becoming a social issue.

• When household debt exceeds appropriate levels, it becomes a factor that hinders economic growth and increases financial instability. Therefore, the government and financial authorities are implementing various regulatory policies to manage household debt growth at appropriate levels.

✅ Financial Authorities' Household Debt Management Policies

• Let's examine the main policies implemented by the government and financial authorities to manage household debt.

  • First, strengthening loan screening through DSR regulation is key. DSR is the ratio of principal and interest payments for all loans divided by annual income, which more accurately evaluates a borrower's actual repayment ability. The government has gradually strengthened DSR regulations since 2021, and since July 2023, Phase 3 has been implemented, applying DSR to all loan sizes. From January 2025, the stronger "stress DSR" system was introduced, which evaluates whether loan repayment is possible even if interest rates rise by 3 percentage points. As a result, even people with the same income may see their possible loan amounts decrease by 20-30%.

  • Second, mortgage regulations such as LTV and DTI are also important tools. LTV (Loan to Value ratio) and DTI (Debt to Income ratio) regulations help prevent excessive growth in mortgage loans. Currently, the LTV limit in most areas is 70% and the DTI limit is 60%, but lower limits apply in speculative zones and overheated zones. Stricter standards also apply to multi-homeowners or speculative home purchases. These regulations work effectively, especially during periods of rapid real estate price increases, helping slow the pace of household debt growth.

  • Third, policies to support vulnerable groups and manage interest rate risks are also being pursued. The government is implementing policies to ensure financial access for ordinary citizens and vulnerable groups while preventing excessive debt. For example, it provides financial products for ordinary citizens (policy mortgages, credit recovery support, etc.) and operates programs supporting conversion from variable-rate loans to fixed-rate loans. It is also pursuing policies to improve household debt structure by increasing the proportion of loans with installment payments of principal and interest while reducing the proportion of loans with lump-sum principal payments at maturity. These policies aim to ease the burden on vulnerable groups when interest rates rise and enhance financial system stability.

• Household debt management policies are flexibly operated, considering real estate market conditions, economic trends, and interest rate environments. The important thing is to take a balanced approach that controls household debt growth rate at an appropriate level while ensuring financial access for actual users and vulnerable groups.

✅ Future Household Debt Outlook and Financial Consumer Response Measures

• Let's look at the second half household debt trend forecast and what financial consumers should prepare for.

  • First, household debt growth is expected to continue slowing in the second half, but there are also variables. Due to strengthened loan regulations such as Phase 3 stress DSR implementation, the household debt growth trend is expected to continue slowing. The Bank of Korea forecasts that the annual household debt growth rate will stabilize in the 3% range. However, the possibility of base rate cuts in the second half and real estate market volatility could act as uncertainty factors. In particular, if interest rate cuts begin, housing purchase demand may revive, possibly increasing mortgage loans again. Also, if living expense loan demand increases due to delayed economic recovery, personal loans may increase.

  • Second, it's necessary to check loan structures to prepare for interest rate volatility. Although there are high expectations for interest rate cuts currently, global economic uncertainties mean both upward and downward interest rate volatility exist. Therefore, households with high proportions of variable-rate loans should consider converting to fixed-rate loans. Particularly, households with principal and interest repayment burdens exceeding 40% of income should be cautious as their repayment burden could significantly increase if interest rates rise. Also, consolidating loans scattered across multiple financial institutions to reduce interest burden can be considered. For example, consolidating high-interest personal loans and card loans into low-interest secured loans can significantly reduce interest burden.

  • Third, strengthening household financial soundness and preparing emergency funds are important. In times of high economic uncertainty, it's important to increase household financial stability. First, maintain an appropriate debt level relative to income, and if possible, adopt a strategy of repaying high-interest debt first. Also, it's good to prepare emergency funds equivalent to at least 3-6 months of living expenses for unexpected situations. In the long term, it's important to establish savings and investment plans for stable asset formation rather than relying solely on debt. Financial authorities are also expanding financial education and counseling programs to strengthen household financial soundness.

• The household debt issue affects not only individual financial situations but also the entire national economy. Financial consumers need to establish reasonable loan plans that match their income and repayment ability, and prepare for economic environment changes such as interest rate fluctuations.

4️⃣ In Conclusion

According to the Bank of Korea's announcement, household debt growth is slowing, which can be seen as a positive signal. This is evidence that the financial authorities' active regulatory policies, especially the implementation of Phase 3 stress DSR, are showing effects.

The trend of slowing household debt growth is expected to continue in the second half of the year. However, as uncertainty factors such as the possibility of interest rate cuts and real estate market volatility exist, financial authorities need to maintain vigilance.

From a financial consumer perspective, this situation can be an opportunity to strengthen personal financial soundness. Efforts are needed to check loan structures, prioritize repaying high-interest debt if possible, and prepare emergency funds to increase financial stability.

In the long term, various policy approaches are needed to fundamentally solve the household debt problem, including stabilizing the housing market, increasing income, and improving financial literacy. It's important for the government, financial sector, and consumers to cooperate to create a healthy financial ecosystem.

Ultimately, the key to household debt management is maintaining an "appropriate level." If debt is too low, economic vitality decreases, and if too high, financial instability increases. Therefore, policies and individual efforts should be made to respond flexibly according to economic conditions while strengthening fundamental financial soundness.