South Korea will implement stricter regulations on 50-year mortgages, targeting middle-aged borrowers, as they are seen as one of the main factors escalating household debt.

The Financial Services Commission on Wednesday introduced measures, such as limiting the maximum term for debt service ratio (DSR) calculations and introducing stress tests to better assess borrowers’ ability to repay in DSR calculations.

The measures were announced after a government meeting to monitor household debt. The meeting was joined by the Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, Bank of Korea, and Financial Supervisory Service.

To prevent borrowers from avoiding DSR regulations by abusing long-term mortgages, the maximum term for DSR calculation will be limited to 40 years.

However, a longer term is still allowed for borrowers that are able to repay over a period of 50 years or longer, based on their age and financial status assessment.

Stress tests will also be introduced for DSR calculations to account for any possibility of increased repayment burdens compared to the time of loan origination due to rising interest rates.

The DSR stress test enables the application of a higher interest rate, instead of the market rate at the time of loan origination, ultimately increasing the repayment burden and reducing the loan limit.

Measures to limit the total loan amount are also being sought, based on an assessment of borrowers’ future income streams.

For example, loans with repayment periods of over 30 years for middle-aged individuals will have a lower limit for their loans, taking into account the expected reduction in their income after retirement.

“The key to managing household debt is adhering to the fundamental principle of borrowing within the scope of repayment ability and repaying in a steady manner,” said FSC Secretary General Lee Se-hoon.

He called for close monitoring by the banking sector of borrowers’ repayment ability.

By Moon Jae-yong and Chang Iou-chung

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