App tells how much you can afford

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App tells how much you can afford

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How much of a loan can you afford for that dream home you want to buy?

Institutions will approve or deny the amount of money you need by using a debt-to-income, or DTI, ratio - a balance between the amount of the loan repayment and a person’s annual income.

If the ratio is approximately 13 percent, it is considered at a level a prospective homeowner can support; if it exceeds 30 percent, the financial burden may be too heavy for the homeowner to afford.

Arriving at the ratio is a complicated equation where the annual debt repayment plus the annual interest is divided by the annual income and multiplied by 100 to give the percentage.

However, a new Android-based app called Ansimjumani, developed by the Financial Services Commission (FSC), has simplified the process and is an immediate guide to affordability.

The app, which literally means “safe pocket,” provides information on loans and can calculate the manageable size of a loan based on a person’s financial situation, including annual income and asset holdings, loan interest rates, management cost and recurring debts.

According to the assessment made by the app, for a person whose annual income is 50 million won ($44,000), the appropriate loan should be 90 million won with installments over 20 years. The maximum would be about 225 million won.

Currently, the average DTI ratio in the greater Seoul area as of June is at 34.5 percent. Although it is lower than the government’s maximum limit of 60 percent, it still exceeds what the authority considers as a safe level where debtors can repay their loans without difficulty.

This suggests that the government could take further actions against a possible debt crisis by tightening the ratio and limiting the loans that borrowers can take out.

The FSC said that it has based the 13 percent and 30 percent ratio on overseas cases. According to the FSC, households with living expenses exceeding 40 percent of their annual income are considered at risk in Europe. Focusing purely on mortgage repayments, the ratio comes to roughly 30 percent.

“Considering that Korean household spending on education is high, we don’t think that the ‘appropriate loan size’ based on the DTI ratio is too strict,” an FSC official said.

The app was created as a follow-up to the FSC’s measurement of household debt announced in July, as debt has been growing at record levels.

The basic aim is to help debtors be able to gradually reduce their debts, especially those who are currently paying back only the interest.

Additionally, the app is intended to give a more precise evaluation of a person’s ability to repay debt.

Recent data has shown that not many requests are made for mortgages at the maximum limit. The government says it has become more important for financial institutions to be more strict and careful in evaluating loan applicants. In August, the average DTI ratio of borrowers fell, even though the government lowered the maximum ratio.

Korea is not the only country where the government is trying to limit loans.

After a two-day meeting earlier this week, the U.S. Federal Reserve decided to freeze its borrowing rate. But immediately after its meeting, the market started speculating about a possible interest rate hike in December. Market experts previously believed the Fed would wait until next year to normalize its monetary policy.

The financial regulator has also decided to implement an interest rate stress test and debt-service ratio, or DSR, as practical tools in further lowering the DTI ratio.

The interest rate stress test considers the impact of an interest rate hike when deciding the maximum limit of debt a person can handle.

There is already talk of adding one percentage point to the current loan interest rate, which would limit the maximum ceiling on loans. When setting the maximum limit, the DSR considers all other loans, including unsecured loans and car installment payments.


BY CHO MIN-GEUN, LEE HO-JEONG [lee.hojeong@joongang.co.kr]

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