🚨 Banks Cut Household Loans in Half: Top 5 Banks Reduce Second-Half Targets by 50%
Today Korean Economic News for Beginners | 2025.07.27
📌 Government Rules Make Loans Harder to Get, Even for First-Time Homebuyers
💬 Because of the government's June 27 household loan management policy, the top 5 banks (KB Kookmin, Shinhan, Woori, Hana, NH Nonghyup) cut their household loan growth targets for the second half from 7.2 trillion won to 3.6 trillion won. According to the Bank of Korea's Financial Institution Lending Attitude Index, credit loan screening became much stricter in the third quarter, and the mortgage loan index fell to -31, much worse than the second quarter. Banks are making it harder to get loans by raising mortgage interest rates and stopping online applications. This means even people who really need to buy their first home will find it harder to get loans.
1️⃣ Easy to Understand
The government has made very strict loan rules to stop household debt from growing too much. This makes it much harder to borrow money from banks. Even people who want to buy their first home are finding it very difficult.
Let me explain what the "June 27 Household Loan Management Policy" is. The government announced this policy on June 27 this year to slow down how fast household debt is growing. Korea's household debt reached 104% of GDP, which is the highest among OECD countries. The government decided they could not let debt keep growing like this.
The main part of this policy is to greatly reduce how much banks can lend to households. The top 5 banks originally planned to increase household loans by 7.2 trillion won in the second half of the year, but now they can only increase by 3.6 trillion won - exactly half. This is not just a suggestion, but basically a forced rule.
As a result, banks have made their loan approval process much stricter. We can see how serious this is by looking at the "Financial Institution Lending Attitude Index" that the Bank of Korea publishes. The more negative this number becomes, the stricter banks are with loans. In the third quarter, the credit loan index was -17 and the mortgage loan index was -31.
We can see how much harder it has become to get loans by looking at what banks are actually doing. They have raised the extra interest rates on mortgage loans and stopped letting people apply for loans online or through mobile apps. They are also using something called "Stress DSR," which is a much stricter standard that considers the possibility that interest rates might go up even more in the future.
The biggest problem is that even people who really need to buy their first home are finding it hard to get loans. In the past, people without homes or newlyweds could get loans more easily, but now everyone has to go through the same strict process.
In the end, ordinary people who want to buy homes now need to save much more money themselves or give up on getting loans altogether.
2️⃣ Economic Terms
📕 Financial Institution Lending Attitude Index
This index shows how strict banks are when they check if someone can get a loan.
- If the number is above 0, it means banks made loan rules easier. If it's below 0, it means they made rules stricter.
- Recently, the credit loan index was -17 and the mortgage loan index was -31, showing that loan approval became much stricter.
- The Bank of Korea publishes this every three months, and it's an important indicator for predicting the future loan market.
📕 Stress DSR
Stress DSR is a stronger standard that checks if someone can pay back loans even if interest rates go up in the future.
- Regular DSR uses current interest rates, but Stress DSR assumes interest rates will go up by 1-2% more.
- For example, if current loan interest is 5%, it checks if you can still pay when it becomes 7%.
- This is a measure to prevent borrowers from having trouble paying when interest rates rise.
📕 Additional Interest Rate
Additional interest rate is extra interest that banks charge on top of the base interest rate. It's how banks make money and manage risk.
- Base interest rate (like COFIX) + Additional interest rate = Actual loan interest rate
- The additional rate changes based on the borrower's credit score, collateral value, and type of loan.
- Recently, banks have been raising additional interest rates to make loan rates higher overall.
📕 June 27 Policy
The June 27 Household Loan Management Policy is a comprehensive set of rules the government announced to reduce household debt growth.
- It greatly reduced banks' household loan growth targets and made loan screening stricter.
- The goal is to stop speculative loans and focus on loans for people who really need homes.
- In the short term, it makes getting loans harder, but in the long term, it aims to prevent economic crisis by stabilizing household debt.
3️⃣ How It Works and Economic Outlook
✅ Why Household Debt Growth is Dangerous and How the Government is Responding
Let's look at why Korea's household debt reached dangerous levels and why the government decided to make strict regulations.
First, Korea's household debt has passed the critical point where it hurts economic growth. By the end of 2024, household debt reached 104% of GDP, ranking first among OECD countries. The International Monetary Fund (IMF) says that when private debt goes over 100% of GDP, it hurts economic growth. Korea has entered exactly this dangerous zone. When household debt is too high, people have less money to spend, which weakens the domestic economy. When interest rates rise, there's a high risk of many people not being able to pay their debts. In fact, many families are already cutting their living expenses because of higher interest payments due to high interest rates.
Second, rising real estate prices and low interest rate policies were the main causes of debt explosion. From 2020 to 2022, apartment prices across the country rose by more than 30%, causing a huge increase in loans for buying homes. At the same time, low interest rate policies to deal with COVID-19 greatly reduced the cost of borrowing money, leading to new terms like "debt investment" (investing with borrowed money). Especially, people in their 20s and 30s engaged in excessive leverage investment through "using everything" (using all available resources to invest), causing household debt to explode. But starting in 2022, when interest rates began rising rapidly, households with variable-rate loans saw their interest burden increase by 2-3 times.
Third, if we don't slow down household debt growth, we risk falling into a "debt trap." A debt trap means having so much debt that the economy can't function properly. Households cut spending to pay off debt, and companies hesitate to invest, causing the entire economy to shrink in a vicious cycle. Korea's household consumption expenditure growth rate already slowed from 3.1% in 2023 to 1.8% in 2024, which is becoming a major cause of economic growth decline. The government's strong loan regulations are a preventive measure to block this risk early.
The government's household loan management policy may be inconvenient in the short term, but it's necessary for long-term economic stability. The key goal is to slow debt growth and achieve a "soft landing."
✅ How Loan Regulations Affect the Real Estate Market and Ordinary People
Let's analyze how strengthened loan regulations will affect the real estate market and ordinary people.
First, we expect real estate transaction volume to decrease and price adjustment pressure to increase. When it becomes harder to get loans, fewer people will try to buy homes, reducing real estate transactions. In fact, Seoul apartment transactions have already decreased by more than 30% compared to the same period last year due to this effect. When demand decreases, pressure for rising home prices naturally weakens, and some areas may see price drops. Areas that had a lot of speculative demand are expected to face greater price adjustment pressure. However, areas with supply shortages may still have upward price pressure, likely showing different patterns by region.
Second, it may become even harder for people without homes to buy their first house. In the past, people without homes or newlyweds could get preferential interest rates or easier loan conditions, but now these benefits are being reduced. Especially people in their 20s and 30s with relatively lower incomes will face greater burden of preparing more of their own money. For example, in the past, you could borrow 70-80% of a home's price, but now it may decrease to 60-70%. This means that to buy a 300 million won house, you need to prepare at least 90 million won of your own money instead of the previous 60 million won.
Third, credit loans and living expense loans will also become harder to get, adding burden to ordinary people's lives. Household loan regulations apply not only to mortgage loans but also to credit loans. When it becomes difficult to get bank loans in urgent situations, some people may risk using high-interest private loans. Also, business loans for self-employed people will decrease, potentially worsening difficulties for small business owners. The government is expanding support for ordinary people's finances to minimize these side effects, but it will take time for actual effects to appear.
The effect of loan regulations is like a double-edged sword. While it can suppress household debt growth, damage to real buyers is also inevitable. The government urgently needs to prepare supplementary measures to minimize these side effects.
✅ Future Outlook and Response Strategies
Let's look at expected scenarios if loan regulations continue and response strategies for individuals.
First, loan regulations are expected to continue for some time and may be adjusted gradually. The government has set a goal to manage household debt growth rate at 4-5% annually. Considering that the current household debt growth rate is at 8-9%, it will take considerable time to achieve this goal. However, there's also possibility to adjust regulation intensity based on economic conditions or real estate market trends. Especially if economic recession deepens or the real estate market shrinks rapidly, some easing measures might come out. But overall, the regulatory approach is expected to be maintained in the big direction of "household debt stabilization."
Second, we expect loan condition differentiation and emergence of new financial products in the financial market. Banks are likely to segment customers more to efficiently distribute limited loan quotas. They will probably provide relatively favorable conditions to excellent customers with high credit scores and stable income, while applying stricter conditions to others. Also, new types of loan products may emerge, such as strengthened installment repayment methods or income-linked repayment systems, in addition to existing loan products. Non-bank sectors are expected to try to absorb loan demand even at relatively high interest rates.
Third, individuals need more careful financial management and exploration of various alternatives. In situations where it's difficult to get loans, it's important to increase the proportion of your own funds. If you're planning to buy a house, you might consider preparing more funds in advance or adjusting the purchase timing. It's also good to actively use interest-free or low-interest loan programs provided by the government or local governments. There are various policy finance products such as loans for newlyweds, youth housing fund support, and first-time homebuyer support, so it's important to carefully check benefits that apply to you.
In the era of loan regulations, stable asset accumulation and financial management have become more important than "investing even with borrowed money." There will be short-term difficulties, but in the long term, a healthier financial culture may be established.
4️⃣ In Conclusion
The government's strong household loan regulations are an unavoidable choice for Korea's economy to escape the "debt trap." In the short term, it will be harder to get loans, worsening difficulties for ordinary people, but in the long term, it can be said to be a necessary measure for economic stability.
In a situation where household debt reached 104% of GDP, recording the highest level among OECD countries, it was difficult to continue ignoring debt growth. Many families are already cutting consumption due to increased interest burden from high interest rates, and this is becoming a major cause of economic growth slowdown. The government's decision to cut the top 5 banks' second-half household loan targets in half is intended to preemptively block such risks.
However, side effects from such regulations are also significant. Even people who really need homes are finding it harder to get loans, making the dream of homeownership even more distant. Also, credit loans have become stricter, creating risk that ordinary people who urgently need funds might be forced into high-interest private loans.
In this situation, individuals need more careful financial management. Rather than excessive loans, it's important to increase the proportion of their own funds and actively use various policy finance benefits provided by the government. It's also advisable to focus on stable asset accumulation rather than real estate investment.
From the government's perspective, they should not just stop at blocking loans but prepare various support measures for real buyers. They need to minimize side effects of regulations through expanding youth housing fund support, increasing public rental housing supply, and expanding interest-free loan programs.
In the end, current difficulties can be said to be growing pains in the process of creating a healthier and more sustainable economic structure. This is a time when all economic actors need wisdom to cooperate for long-term stability even if they have to endure short-term inconvenience.