LTV ratio will be raised to save property market

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LTV ratio will be raised to save property market

Amid ongoing talks between the Ministry of Strategy and Finance and the Financial Services Commission (FSC) on ways to revive the real estate market, the two authorities have agreed to raise the loan-to-value (LTV) ratio to a single rate of 70 percent, while they remain apart on relaxing the debt-to-income (DTI) ratio.

The Finance Ministry is pushing for easier lending rules to boost the moribund property market and revive the economy as soon as its new minister, Choi Kyung-hwan, takes office. But the FSC is afraid that easing restrictions on renting or buying property will only exacerbate the nation’s growing household debt.

Ever since Choi was appointed, the two property market regulations have been in the headlines since they are considered the main retardants of the market.

According to the FSC yesterday, the FSC and Finance Ministry are now considering setting the LTV ratio at 70 percent for all regions and age groups.

The LTV ratio, introduced in 2006 by the Roh Moo-hyun government to cool down an overheated property market, is a gauge used by banks to determine the amount of a home-backed loan based on the market value of the house. The rate varies by city, but the average is 50 percent of a house’s worth in Seoul and its metropolitan area. Loans can be up to 60 percent in rural regions.

A recent study by Konkuk University’s Research Institute of Real Estate and Urban Studies showed that easing the LTV ratio would primarily benefit higher-income households, whereas raising the DTI limit would benefit lower-income households.

If the LTV percentage is raised to 70 percent, the average ceiling for mortgages for apartments in Seoul and nearby areas will increase by 67 million won ($65,191), given that the average apartment price in the region was 338 million won as of June.

“Those who are financially capable and have been waiting for the regulations to be lifted are expected to make purchases if the LTV is raised,” said Choi Ki-hoon, a realtor in Banpo-dong, in Seocho District, southern Seoul.

The LTV is known to inhibit residents in affluent areas like Seocho, Gangnam and Songpa districts, experts say, who have high incomes but haven’t been able to buy a house due to the ratio.

“Raising the upper cap on the loan will lower the threshold for consumers to join the market,” said Park Won-kap, a senior real estate researcher at KB Kookmin Bank. “The measure will help increase transactions.

“But it can only be a temporary effect,” Park added. “Loosening the loan regulation is a short-term measure because it doesn’t increase consumers’ purchasing power in the long term.”

The two authorities have agreed on raising the LTV ratio, but still disagree on the DTI.

The DTI ratio determines the maximum amount a person can borrow to buy a house based on annual income. It currently stands at 50 percent in Seoul, meaning the maximum mortgage loan payments per year can’t exceed 50 percent of annual income. The figure is 60 percent for metropolitan areas in Gyeonggi and 40 percent for the districts of Seocho, Gangnam and Songpa, where speculation was rampant.

The Finance Ministry wants to make the DTI ratio 60 percent for all areas. The FSC is opposed, citing the household debt problem. The financial authority says the DTI is needed to manage household debt in an efficient way.


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