Relaxed DTI rules to prop up market for housing

The country’s financial watchdog eased the debt-to-income (DTI) ratio restriction for young employees and older retirees as part of the government’s efforts to revitalize the domestic market, especially the long-ailing property market. The Financial Services Commission announced yesterday that it will apply higher DTI ratios for employees under the age of 40 and retirees who own assets that can be converted into income.

The DTI ratio, introduced in 2006, determines the maximum amount of loans a person can take out to buy a house in proportion to annual income. It currently stands at 50 percent in Seoul, 60 percent for Seoul metropolitan areas, and 40 percent for the three Seoul districts of Seocho, Gangnam and Songpa, where speculation is rampant.

The government has been wary about moving to ease the DTI restriction because of the rising household debt problem, although realtors have long been demanding the cap be lifted as frustration builds about the continuing recession in the housing market. However, it decided on July 21 to make minor amendments.

Under the revision, young employees will be able to take out loans worth 25 percent more than at present when buying a house. Banks will estimate their projected salary for the next 10 years based on anticipated raises and use this to determine the maximum mortgages they are entitled to. According to the National Tax Service, the average income growth of employees in their 20s is estimated to reach 52.1 percent over the next 10 years. The same figure for those in their 30s stands at 31.8 percent.

The current DTI rule puts a cap on mortgages for young employees based on their salary without considering future income growth.

The restriction will also be eased for retirees who aren’t able to earn money, but own assets including land, residences and buildings. At present, such assets are not considered income, making it difficult for retirees to get mortgages. The new DTI rule allows for the value of retirees’ assets to be converted into income, which is then used to calculate how much they can take out as loans. The maximum amount of converted income cannot exceed 51 million won ($44,940).

The DTI ratio for those who purchase houses worth more than 600 million won will be raised by 15 percentage points.

By Song Su-hyun [ssh@joongang.co.kr]