The Korean government unveiled a package of measures on April 1 to boost housing market. The measures provide tax breaks for first-time home buyers and ease the burden of mortgage repayment for the “house-poor.” Amid the growing concern about Korea’s household debt, regulations on LTV and DTI are temporarily eased only to first-time home buyers. So, what are LTV and DTI? And how do they actually work?
LTV is short name of ‘Loan to Value ratio’. It means the ratio in which banks approve the value of the house someone owns. It limits amount of the money someone can loan on security of his house. For example, when LTV is 60%, a person who has an apartment which costs 3billion won can borrow money from a bank up to 1,8000million won. Nowadays, in capital area, LTV is 50% on houses of price lower than 6000 million won and 60% on others.
DTI means ‘Debt to Income ratio’. It limits the size of the loan in comparison to one’s yearly income. It also complements LTV ratio’s shortcomings. Unlike LTV, people can borrow money in proportion to his earning ability, not in proportion to the price of mortgage. That means only people who can earn certain amount of money yearly can get a loan that he wants. Currently DTI ratio is 50% in Seoul, 60% in other capital area.
Therefore when LTV and DTI exist, government can regulate excessive speculation on real estate using mortgage loan. Government can also use them as ways to boost or cool down real estate market when it is necessary.
After the global financial crisis, real estate market in Korea has been depressed for a long time. Therefore, there were a lot of discussions and claims about abolishing DTI and LTV to boost the market. However, to adjust these things rashly, there are still many things to consider. If the regulations were abolished, or highly alleviated, financial soundness can be deteriorated as financial crisis of 2008. As many experts including a head of Financial Services Commission, Shin Je-Yoon agreed to such a concern, it is hard to expect where the regulation will make its way.
By Minjung Kwon (Kwonm21@naver.com)