Banks and Consumers Highlight Confusion over ‘Ability to Repay’ Requirements for 50-Year Mortgage Loans
Financial authorities have recently faced criticism regarding their “ability to repay” regulations for 50-year mortgage loans, which have been identified as a major cause of the mounting household debt. Both banks and consumers argue that there is considerable confusion surrounding these requirements.
The banking sector typically determines the loan size based on the borrower’s annual income over a two-year period. However, to prevent the evasion of debt service ratio (DSR) regulations and the acquisition of substantial loans through 50-year mortgage loans, financial authorities established a threshold known as the “verification of ability to repay”. Under this provision, a 50-year maturity period is only permitted if the borrower can clearly demonstrate their ability to repay. Otherwise, the maturity period is limited to 40 years. This has led to discussions about whether factors such as future income, life expectancy, occupation, and retirement plans should also be taken into account alongside proven income.
“For instance, civil servants often have stable jobs, so issuing numerous loans to them may result in dissatisfaction among borrowers in other occupations,” shared an official from a commercial bank. They further added, “Considering the multitude of variables for each borrower, it begs the question of whether it is genuinely possible to demonstrate their ability to repay through this approach.” Another official expressed concerns over potential audits, stating, “I worry that the financial authorities may hold banks responsible for their decisions.” This further highlights the need for clear standards regarding eligibility for a 50-year maturity loan.
A criticism raised against these regulations is that they could potentially result in reverse discrimination against middle-aged individuals. Even if a borrower in their 20s plans to work until the typical retirement age of 60, they would face difficulties proving their repayment ability post-retirement. Professor Seok Byeong-hoon from Ewha Womans University highlighted that in the United States, individuals often purchase homes with mortgages that are repaid over a 30-year period without any requirements regarding retirement.
Professor Shin Se-don from Sookmyung Women’s University added that while job stability, income, and years of service can be taken into account to assess the borrower’s ability to repay, the simplicity of such an approach can lead to discrimination issues, suggesting that only individuals with secure employment can borrow money.
Regulatory Measures Implemented to Address Concerns
The Financial Services Commission has recently introduced administrative guidelines aimed at improving the calculation of debt service ratios for long-term mortgage loans. Additionally, they have begun implementing measures to set a maximum maturity period of 40 years for loans without sufficient proof of repayment capacity. The Financial Supervisory Service is also currently reviewing home loan practices in major banks, with their findings expected to be released by the end of this month.
By Reporters Song Soo-yeon and Yoo Gyu-sang
“There are no standards for who can be allowed and who can’t”
There are many variables such as future income and life expectancy.
There is also the issue of ‘differentiation’ when taking out loans depending on the workplace.
Banks and consumers are complaining that there is confusion over the financial authorities’ order to prove ‘ability to repay’ when providing ’50-year mortgage loans’, which have been identified as the core of the recent surge in household debt.
According to the financial sector on the 14th, when determining the range of the total debt service ratio (DSR), the banking sector usually determines the size of the loan by considering the principal loan and interest repayment amount from annual income based on ‘two years of certified income’. It can be seen as a simple calculation based on the borrower’s current income. However, in this measure, the financial authorities created a threshold called ‘verification of ability to repay’ to prevent 50-year mortgage loans from avoiding the DSR regulations and receiving large loans. A maturity period of 50 years is only applied when ‘ability to repay is clearly proven’, and if it cannot be proven, it is limited to a maturity of 40 years. Accordingly, in addition to proven income, there is talk about whether variables such as future income, life expectancy, occupation and retirement time should also be considered.
An official from a commercial bank said, “For example, civil servants have stable jobs, so if they take out a lot of loans, the dissatisfaction of borrowers in other occupations may increase.” He added, “There are many variables for each borrower, so is it really possible to clearly demonstrate the ability to repay by reflecting this?” he said. Another official said, “I am very worried that the financial authorities will hold the bank responsible when they audit it later,” and added, “In fact, it is necessary to explain to borrowers who can get a 50-year maturity loan and who can’t, but there are no clear standards “It’s a situation where there is no such thing,” he said.
Some point out that this is reverse discrimination against middle-aged people. In the case of a 50 year mortgage loan, even if you are in your 20s and working until the retirement age of 60, how can you prove your ability to repay after retirement? Seok Byeong-hoon, professor of economics at Ewha Womans University, said, “Even in the United States, people buy a house with a product that repays the mortgage over a long period of 30 years, and I have never seeing anyone say that they shouldn’t retire before the house matures.” “It operates annually and does not reflect lifetime,” he said.
Shin Se-don, a professor of economics at Sookmyung Women’s University, said, “You can check the borrower’s ability to repay based on job, income, years of service, etc., but if you look at it simply, discrimination problems can arise, like only people with good jobs can borrow money.” .
Meanwhile, the Financial Services Commission prepared administrative guidelines related to repayment ability screening, including improving the maturity DSR calculation of long-term mortgage loans, and started implementing it the previous day. The Financial Supervisory Service will also review the regulations to set a maximum of 40 years when it has not been proven that there is sufficient repayment capacity when calculating DSR. At the same time, we are also checking the status of home loans in major banks until the end of this month.
Reporters Song Soo-yeon and Yoo Gyu- sang
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