How have you been guys? As you guys would have known (I hope so), my latest article was on the LTV regulations. Yes, today, I am going to introduce a concept that is in an inseparable relation with the LTV! It is called DTI. I will briefly introduce the notion of DTI and tell you FSC’s new proposal.
DTI is an abbreviation for “debt to income ratio”. DTI is the percentage of a consumer’s gross income that goes towards paying debts. One more thing you need to know is that DTI covers not only debts but also taxations, insurance premiums and some other fees.
There are two kinds of DTIs. First one is called front-end ratio which indicates the percentage of income that goes into housing costs. And obviously, the second one is back-end ratio which is the percentage of income used for paying all the recurring debt payments. Now! You should be getting a brief idea of DTI. So for now let us take a look at the new regulation proposal introduced by the FSC.
You might ask a question, “What is the problem brought up about the current DTI regulation?” Yes, indeed, the current regulations might be okay. However, as the economic situations and government policies change, financial regulations need changes as well. There have been numerous discussions on how to improve the current DTI regulations. The FSC has gathered lots of information and suggestions, and finally comes up with this new proposal. This proposal seeks to maintain the basic principles to ensure borrowers’ repayment abilities, while adding some other complementary measures outlined below;
- For young borrowers with stable income, estimates of their expected future income will be reflected into the denominator of income. As their income will gradually increase over their work period, there is a need to take into account their expected future income. This new rule will be applied only to first-home buyers aged less than 40 years old. The applicants should submit documents issued by tax offices to prove earned. There is one thing you guys must remember here! The loan types covered by this new rule are only the loans with installment payments of principal and interest over the period of time longer than 10 distinctive years.
- The second part is about retirees. Until now, the DTI regulation has not counted borrowers’ assets as income in order to prove their debt payment ability. However, there are retirees who own assets but whose ability to earn income is hard to be proven. So there is a need to take into account their assets when assessing borrowers’ debt repayment ability! Of course, this new rule will be applied under the certain requirements. Please pay attention to this new rule, as it is one of the most important information of the new proposal!
For those who own assets but cannot prove their earned income, assets that meet the following conditions will be counted as income with the implementation of the new proposal.
– (Asset owner) borrower and his/her spouse
– (Asset types) land, building, house, and rent subject to property tax under tax law
– (Asset value) value in market prices under tax law or appraised value
– (Exemptions) debts of borrower and his/her spouse
– (Income conversion) Financial institutions may decide the amount of income applicable to DTI ratios with income cap of borrowers’ net assets multiplied by weighted average interest rate for banks deposit savings.
- The last part is about the financial income. Under the current DTI regulation, taxpayers were not allowed to combine their earned income with financial income when they reported their income to the tax office. However, with the revised proposal, even for those who separately pay taxes on their financial income will be allowed to add financial income to their income proof! By now you should realize that the revised plan is aimed at improving the overall quality of low and middle income earners.
Is my blog post letting you understand that the revised regulation is in need? This new proposal actually shows how the FSC has been trying hard to find proper measures that would better promote households’ lives. According to the FSC, the implementation of the new proposal will be adopted as soon as possible through administrative guidance. Banks are the first sectors which this new rule will be applied. Whether the rule should be applied to non-banking sectors will be decided later on. The FSC will evaluate both positive and negative effects of this new regulation within a year. I sincerely hope you guys pay attention to how the new rule goes on as time passes by, it might be interesting and you would get benefited from the new regulation!.