FSC to tighten income checks in DSR calculations, hold household loan growth target at 1.5%

South Korea's financial regulator is reviewing plans to tighten income verification standards when calculating the debt service ratio (DSR), including stricter rules on how temporary income such as bonuses is counted.

One option under consideration would apply a three-year average — rather than the current two-year average — when assessing irregular income. The intent is to make income reviews more rigorous to prevent loans from exceeding borrowers' repayment capacity.

The annual household loan growth target will be kept at 1.5%. The Financial Services Commission also plans to require additional capital reserves for high-risk mortgage loans — including large loans with high DSR ratios and loans on high-priced properties with high loan-to-value (LTV) ratios — to reduce lenders' incentive to extend such credit.

FSC Chairman Lee Eok-won announced the measures as part of a plan for trustworthy financial practices at a second-half work report held at Cheong Wa Dae on Wednesday. "We will manage the total volume of household debt in a stable manner and continue to keep real estate and finance insulated from each other," he said.

The FSC said it will first entrench a lending practice of extending only as much credit as borrowers can repay, primarily by strengthening income verification in DSR calculations. Loans classified as high-risk mortgages — covering large loans with high DSR ratios, loans on high-priced properties with high LTV ratios, and loans to multi-home owners — will be separated into a distinct category, and the financial burden on lenders handling such loans will be raised.

The FSC also plans to block speculative home purchases that rely on leverage. Among the measures under review, at President Lee Jae Myung's direction, are loan restrictions on non-resident single-homeowners buying for speculative purposes, a reduction in the jeonse loan guarantee ratio (excluding those without homes), and routine inspections of illegal and irregular lending practices.

Although some have argued that the annual household loan growth target should be raised given that nominal GDP growth this year is expected to exceed 10%, the FSC decided to hold the target at 1.5%.

FSC Secretary General Shin Ji-chang said at a briefing on Tuesday that the regulator would not manage household loans by looking solely at the household debt-to-GDP ratio. "The size of household debt has not shrunk," he said, adding that the ratio of household debt to GDP remains far higher in absolute terms than in advanced economies, where it sits in the mid-60 percent range."

"There is a concern that easing the household debt management stance at this point could stimulate the real estate market," he added. "It would also run counter to the government's productive finance transition policy, which aims to redirect capital from unproductive household mortgage loans toward productive sectors." The FSC said it will draw on the results of real estate forums beginning Wednesday to develop financial regulatory measures capable of curbing speculative housing demand.

The FSC plans to expand market stabilization programs while continuing to monitor the soundness of the financial sector. In particular, to respond preemptively to financial institutions' potential insolvency risks, the regulator will establish a financial stability account and introduce a rapid resolution regime as part of broader financial stability system reforms.

Alongside this, the FSC will build an AI-based insurance fraud prevention infrastructure and strengthen anti-money laundering (AML) regulations to bolster its capacity to respond to market-disrupting activities such as illegal financial transactions and financial fraud.

A plan to advance financial company governance standards, originally scheduled for release in March, has been pushed back to July. The package is expected to broadly cover measures to fundamentally block CEOs from entrenching themselves on boards, improvements to reappointment procedures, a stronger role for institutional investors, and greater rationality in performance-based compensation practices.

A reform plan covering financial administration and supervision — including inspections, sanctions and licensing — will be prepared by September. A digital asset law to foster an innovative digital asset ecosystem will be drawn up within the year, and the FSC also plans to press ahead with a full lift of network separation requirements, the enactment of a digital financial security law, and an overhaul of the personal credit information consent regime.