Apartment complexes are seen from Mount Nam in Seoul, Friday. Yonhap

The government began implementing the second phase of stressed debt service ratio (DSR) rules, Sunday, to curb a rapid increase in household loans.

The stressed DSR regulation adds an extra stress factor when calculating the amount of the principal and interest a borrower must pay relative to their annual income. This measure effectively lowers the maximum loan limit.

The latest action is aimed specifically to increase the additional interest rate on mortgages within the Seoul metropolitan area.

According to a simulation by financial authorities, a borrower with an annual income of 60 million won ($45,000) could borrow up to 419 million won from a bank for a home located within the Seoul metropolitan area, with a 30-year variable interest rate of 4 percent, before the introduction of the stressed DSR regulation.

After the first phase of the stressed DSR regulation took effect in February, the loan limit for the same hypothetical mortgage was reduced to 400 million won.

With the implementation of the second phase, the loan limit would be reduced further to 364 million won.

For locations outside the Seoul metropolitan area, the limit on the same loan would decrease to 383 million won.

The reduction in loan limits is estimated to be 4 percent for mortgages with a five-year fixed interest rate in the Seoul metropolitan area and 3 percent in other regions. For variable interest rate mortgages, the limits are expected to decrease by 13 percent in the Seoul metropolitan area and 8 percent in other regions.

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As concerns mount over economic strain caused by rising household loans and escalating home prices, particularly in Seoul and its surrounding areas, financial authorities have been tightening lending regulations gradually by implementing stricter DSR rules.

The first phase of implementation added a stress interest rate of 0.38 percentage point to mortgages provided by banks.

The second phase introduces an additional interest rate of 0.75 percentage point to mortgages from banks and secondary financial institutions. For homes located in the Seoul metropolitan area, an additional rate of 1.2 percentage points is applied to bank mortgages.

“We will make every effort to thoroughly prevent the increase in household debt driven by speculative demand, while minimizing difficulties for those buying homes to live in,” said an official at the Financial Services Commission (FSC), the country's top financial regulator.

Household loans extended by banks have risen for five consecutive months. In August, the total increased by 8 trillion won as of Aug. 29, marking the largest rise since July 2021, when it grew by 9.6 trillion won.

The authorities will also inspect the secondary financial sector to prevent a balloon effect, whereby mortgage loan demand could shift from banks to other financial institutions subject to relatively looser government regulations.

They plan to monitor daily changes in household loans and leading indicators, such as loan application numbers, at financial institutions like NongHyup and MG Community Credit Cooperatives as well as insurance companies.