The South Korean government will move forward with plans to tighten household lending regulations starting in July 2025, while easing the rules for non-metropolitan areas to address concerns over unsold properties.

At a monthly press briefing held Wednesday at the Seoul government complex, Financial Services Commission (FSC) Chairman Kim Byoung-hwan said the third phase of the stress-tested debt service ratio (DSR) framework will take effect on July 1st, 2025, with differentiated application between the Seoul metropolitan area and regional markets.

Kim noted that detailed measures, including the applicable stress interest rates used for DSR calculations, will be finalized later in May in coordination with related agencies.

Financial regulators are currently reviewing a proposal to apply a stress interest rate that is 0.3 to 0.5 percentage points lower in regional areas compared to the capital region, in consideration of unsold homes. For regional banks, the stress interest rate may be raised from the current 0.75 percentage point to 1.0 or 1.2 percentage points. The new framework is expected to make mortgage borrowing more difficult in the Seoul metropolitan area in the second half of the year.

The DSR is calculated as the ratio of a borrower’s annual debt service obligations, including both principal and interest payments, to their annual income. Under current regulations, banks may lend only if the borrower’s DSR is below 40 percent, while the limit is 50 percent for savings banks. The stress-tested DSR system tightens lending criteria by applying a regulatory buffer, known as a stress interest rate, to the actual loan rate when calculating the DSR.

The second phase of the DSR regime has been in effect in Korea since September 2024. Under the framework, an additional 1.2 percentage points is added to interest rates for borrowers in the Seoul metropolitan area and 0.75 percentage points for those in regional areas when calculating the DSR for mortgage or credit loans from banks and non-bank lenders.

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