Table of Contents
- What Changes with the Upcoming Implementation of 3-Step Stress DSR
- What is Stress DSR?
- Changes in the 3-Step Implementation and Its Targets
- Differences Between the Metropolitan Area and Regional Areas… Polarization of Loan Conditions
- Market Impact… Concentration of Loans and Housing Price Trends
- How Should Actual Demanders Prepare for DSR Step 3?
What Changes with the Upcoming Implementation of 3-Step Stress DSR
The government has confirmed the implementation plan for the '3-Step Stress DSR' to strengthen household debt management. This decision was made during the household debt monitoring meeting held by the Financial Services Commission on May 20, and it is set to be fully implemented from July 1, 2025.
The main content is to set the stress interest rate at a higher 1.50% to preemptively prevent loan risks associated with variable interest rates. This standard will apply to household loans across all financial sectors. However, regional housing loans will maintain a stress interest rate of 0.75% until the end of this year, offering a grace period for a certain period.
Because the loan limit is determined differently based on the interest rates, it would be good to refer to the post below for detailed information.
What is Stress DSR?
DSR (Debt Service Ratio) is the ratio of the total debt principal and interest that a borrower must repay annually to their annual income, which is an important criterion used in the loan evaluation process by financial institutions. 'Stress DSR' adds a premium interest rate that considers the possibility of rising interest rates to assess the ability to repay loans.
The stress interest rate currently applied in Step 3 is fixed at 1.50%. Although it is not reflected in the actual loan interest rate, it is added to the standard interest rate used in DSR calculations. As a result, the borrowing limit for the borrower decreases, leading to a promotion of transitioning to fixed-rate loans.
This change may impose financial pressure on borrowers and is expected to have significant impacts on their future loan planning.
Changes in the 3-Step Implementation and Its Targets
The third step, following February and September 2024, is expected to be applied to virtually all household loans.
The main changes are as follows. The scope of application is expanded to include housing loans, credit loans, and other loans provided by banks and second-tier financial institutions. This change will take effect from July 1, 2025.
The stress interest rate is set at 1.50% in both the metropolitan area and other regions, while regional housing loans will have a grace period of 0.75% until the end of this year. This will impact not only housing loans but also credit loans exceeding 100 million KRW.
In particular, the percentage of the stress interest rate applied to variable, mixed, and periodic loan products will change. Mixed loans can reflect up to 80%, and periodic loans can reflect up to 40%, which means borrowers exposed to variable interest rate risks may see a significant reduction in their borrowing limits. These regulatory changes are expected to have a considerable impact on the financial market.
Key Points and Changes in the 3rd Step
From Step 3, all financial institutions will apply a stress interest rate of 1.50% to housing loans, credit loans, and other loans. In the metropolitan area, the borrowing limit for a variable rate mortgage (30-year, variable interest rate of 4.2%) will decrease by about 3-5% compared to Step 2, dropping from 590 million KRW to 570 million KRW for borrowers with an annual income of 100 million KRW. Additionally, as the addition rate for mixed and periodic loans increases, a transition to pure fixed-rate loans is effectively being promoted.
0.75% Grace Period for Regional Housing Loans, Regional Differences
As the rate of increase in household debt in regional areas has recently decreased, the premium interest rate will remain at 0.75% until the end of the year. This provides temporary relief for actual demanders in regional areas. However, if a review occurs at the end of the year, there is a high likelihood that the rate will increase to 1.50%.
Additionally, as the differences in loan conditions between regions widen, there are concerns that some of the buying interest in the metropolitan area may shift to certain regional areas. It is essential to pay attention to how these changes will affect the real estate market in the future.
Differences Between the Metropolitan Area and Regional Areas… Polarization of Loan Conditions
Considering that the rate of household debt increase is relatively low in regional areas, the government has decided to maintain the existing stress interest rate of 0.75% for housing loans in those areas until the end of this year.
For example, if a borrower in the metropolitan area with an annual income of 100 million KRW uses a 30-year variable-rate mortgage, the borrowing limit will decrease by about 19 million KRW (about 3%) after the implementation of Step 3. However, there will be no such change in regional areas.
This policy can be seen as a differentiated approach to suppress overheating in the metropolitan real estate market while providing a buffer period for the regional market.
Impact on Apartment Prices
In the short term, the likelihood of a reduction in borrowing capacity may slow the rise of high-end apartment prices in the metropolitan area. On the other hand, regional areas may find temporary relief due to the grace period for the premium interest rate, which may lead to an intensification of polarization in price and transaction volume between regions.
In the long term, it is widely believed that when the cycle of declining interest rates begins in earnest, the Stress DSR will serve as an 'automatic brake' to prevent excessive leverage expansion. Such changes are expected to significantly impact the real estate market.
Market Impact… Concentration of Loans and Housing Price Trends
In the short term, there is a high possibility of a surge in loan demand before the regulatory enforcement in July. Especially, actual demanders and investors in the metropolitan area are expected to show movements to secure loans beforehand.
In the long term, as risk management for variable interest rates is strengthened, it is likely that the rate of debt increase will stabilize. The willingness to buy apartments is also expected to weaken. Even in a situation where there are expectations for interest rate cuts, the implementation of the Stress DSR will likely contribute to restraining excessive leverage for borrowers.
However, the temporary grace measures in regional areas may widen the price gap, potentially becoming a new variable when reviewing interest rates at the end of the year. Such changes will significantly impact the future real estate market.
How Should Actual Demanders Prepare for DSR Step 3?
The 3-Step Stress DSR is not simply a loan regulation; it functions as a system to defend against risks in the financial system. It is designed to prevent a surge in loans not only during periods of rising interest rates but also during declining interest rate scenarios, making it significant.
Actual demanders should assess their loan limits through financial consultations before July and preferably choose fixed-rate products over variable rates. Moreover, those living in regional areas should take the opportunity of the grace period to review their financial plans.
The government emphasizes thorough assessments of repayment ability and prevention of concentration in lending by financial institutions, indicating a continuous management policy to enhance the overall soundness of the market. These measures will play a crucial role in maintaining the stability of the financial market.
#StressDSR, #3StepDSR, #DSRStrengthening, #ReductionofLoanLimits, #MetropolitanHousingLoans, #RegionalHousingLoans, #2025DSR, #FinancialServicesCommission, #HouseholdDebtManagement, #VariableInterestRateRisk, #FixedRateLoans, #StressInterestRate, #DSRImplementation, #StrengtheningLoanRegulations, #ApartmentPrices, #MetropolitanRealEstate, #RegionalRealEstate, #LoanConcentration, #RealEstatePolicy, #StrategiesforActualDemanders, #DSR1point5, #FinancialPolicy, #HouseholdLoans, #LeverageManagement, #CreditLoans, #RealEstateMarketAnalysis, #DSR3StepImplementation, #FinancialSupervision, #HousingLoans, #RepaymentAbility
