Banks Tightening Mortgage Lending Amid ‘Draconian Regulations,’ Loan Growth Deceleration Accelerates

Shinhan Bank, Approval Only for Applications Submitted One Month Prior to Execution
Financial Regulators Blocking High-Value Loans, Intensifying Clampdown
Regulatory Effects Materialize, Loan Growth Slows and Balances Decline

Shinhan Bank has significantly tightened its mortgage screening system, further narrowing its lending channels. By mandating submission at least 20 business days before execution, the bank seeks to prevent screening errors arising from regulatory changes while simultaneously tightening its grip on loan volume management. With the government rolling out successive housing loan curbs on June 27 and September 7, which simultaneously constrain mortgage limits and lower loan-to-value (LTV) ratios, banks are raising screening thresholds in line with overall contraction directives. As a result, the mortgage balances of the five largest banks have turned negative for the first time in a year and a half, underscoring the tangible effects of regulation.

Shinhan Bank strengthens loan acceptance and review processes to manage total loan volume

According to financial industry sources on the 16th, Shinhan Bank has revised internal guidelines since early this month, requiring applications for both mortgages and lease loans to be submitted at least 20 business days in advance for approval, with the measure now integrated into its IT systems. Although submission periods vary across banks, it is generally standard to apply two weeks to one month before the execution date.

A Shinhan Bank official noted, “Since household loan regulations continue to change, this measure was established to prevent errors when loan reviews are conducted too close to execution.” Frequent changes to eligibility and borrowing capacity due to repeated regulatory adjustments have often led to oversights at local branches; the new measure is intended to minimize such errors.

Since last month, Shinhan Bank has also suspended the acceptance of mortgage and lease loans through external brokers and announced that no new mortgages will include mortgage credit insurance (MCI) through the end of October. MCI, an insurance policy typically bundled with mortgages, allows higher borrowing limits; without it, loans are capped at the purchase price minus a security deposit, effectively lowering lending ceilings. In addition, restrictions on lease loans, once limited to the capital region, will be expanded nationwide through October.

Loan Ceiling Fixed at $600,000 and LTV Cut to 40%

As banks tighten loan application and screening processes, borrowers face higher hurdles, making it easier for banks to manage overall lending volumes. In response to surging home prices and mounting household debt, the government unveiled its first real estate policy under President Lee Jae-myung on June 27. The centerpiece was capping maximum mortgage lending in Seoul and the metropolitan area at $600,000, while requiring borrowers purchasing homes with mortgages to move in within six months—effectively banning speculative “gap investments.” At the same time, regulators instructed banks to halve their household loan growth targets for the second half. Consequently, the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) were forced to cut loan growth targets by approximately $3.6 billion.

Barely two months later, the government rolled out its September 7 measures, further tightening mortgage rules. The core provision lowered the maximum LTV ratio in regulated areas from 50% to 40%. For example, a buyer of a $1.2 million property who previously could borrow up to $600,000 would now be capped at $480,000, reducing the ceiling by $120,000. With the metropolitan area already subject to a $600,000 cap, the lower LTV ratio further raises the entry barriers to prime districts in Seoul. If the current regulatory zones—limited to Gangnam’s three districts and Yongsan—are expanded to other areas, borrowing will become even more restrictive.

Mortgage Balances at Major Banks Decline for First Time in 18 Months

Amid sweeping regulations, mortgages at the five major banks, which had continued to expand through last month, shifted into contraction this month. As of September 11, outstanding mortgages at the five banks stood at $607.619 billion, down $524 million from the end of August ($607.671 billion). Should the trend persist through the end of the month, September would mark the first monthly contraction in mortgage balances since March of last year, when they fell by $4.494 billion.

Meanwhile, outstanding unsecured loans rose from $104.079 billion to $104.261 billion, an increase of $1.823 billion. Combining mortgages and unsecured loans, total household debt at the five banks reached $763.070 billion as of September 11, up a mere $1.717 billion from the end of August. Daily average loan growth amounted to roughly $156 million—just one-eighth of August’s daily average increase of $1.266 billion.

The contraction in mortgages and sharp deceleration of household debt growth underscores the impact of the June 27 measures now beginning to materialize. During July and August, real estate transactions executed before the new rules came into force continued to sustain loan growth despite the tougher restrictions. But by September, most of that deferred demand had been exhausted, prompting a reversal in mortgage balances. A financial regulator observed, “Last month, demand for new leases coinciding with the start of the school year even pushed mortgage activity above July levels. But starting this month, the regulatory impact has begun to fully emerge.”