"Bank limits and my repayment ability are different"... 4 key criteria for deciding loan size

While a strategy of expanding the scope of asset formation using loans is necessary, debt at an unmanageable level can shake the foundation of a household economy. Amid growing concerns over interest rate volatility, specific guidelines for calculating an appropriate loan size have been presented.

Limit principal and interest repayments to within 30% of after-tax income

According to the video by author Song Hee-gu, the most important criterion when deciding on a loan is not the limit allowed by the bank, but "whether it is at a level that an individual can live on." Based on a 30-year equal principal and interest repayment, the video recommends setting the maximum amount for principal and interest repayment to about 30% of after-tax income.

For example, if the monthly after-tax income of a dual-income couple is 10 million won, the monthly principal and interest repayment should be limited to within 3 million won. If a single-income earner earns 3 million won after tax per month, the appropriate monthly repayment level is around 1 million won. However, this can vary depending on an individual's situation. The video emphasized that if the proportion of performance bonuses is high or living expenses are low, the upper limit can be raised, but if income is unstable or large future expenditures are scheduled, this standard should be lowered further.

4 elements that must be checked before deciding loan size

To prevent situations where savings capacity disappears due to excessive loans or the inability to respond to sudden expenditures, the following four elements must be checked before executing a loan.

First is income stability. One must look not only at current income but also at the possibility of maintaining future income, and the loan size should differ by considering the characteristics of fixed income, such as salary, and variable income, such as performance bonuses or business income. Second is cash flow. One must check the amount remaining each month after excluding living expenses, insurance premiums, etc., and there should be enough capacity to save at least about 30% of the monthly salary even after bearing the principal and interest. Third is future large-scale expenditure plans. If there are events requiring large sums of money, such as purchasing a car, supporting parents, changing jobs, or preparing for a business, the loan size should be adjusted. The last is the capacity to endure. It is essential to go through a process of calculating whether one can handle a sudden rise in interest rates with their income and cash flow in case interest rates rise more sharply than expected.

Difference between the 2021 interest rate hike period and the current market environment

The video explained response measures by comparing the rapid interest rate hike period of 2021 with the current market environment. At that time in 2021, the Bank of Korea's base interest rate was in an ultra-low interest rate state of 0.5%, but it was rapidly increased to 3.5% in just one and a half years to respond to inflation. The video analyzed that the shock at that time occurred because economic agents who were accustomed to low interest rates faced the 'trigger' of a sudden interest rate rise.

On the other hand, there is a difference in that the current market is in a state where market participants have somewhat adapted to high interest rates after having already experienced one strong interest rate hike cycle. However, just because the market has adapted to interest rate changes does not mean there is no impact on individuals. Through the metaphor, "Even if the egg sushi in the refrigerator is fresh, the egg sushi in my hand can spoil," the video emphasized that 'individualized response' based on one's own income and cash flow is much more important than the market trend. Ultimately, the core principle of utilizing loans is to select the best assets within an affordable range.

An alternative approach: separating residence and investment

In cases where it is difficult to purchase a house due to a heavy loan burden, a 'separation of residence and investment' strategy was also suggested as an alternative. This involves living in a desired area by paying monthly rent to manage housing costs, while simultaneously reviewing redevelopment or urban improvement projects using the remaining funds. However, it added that in the case of redevelopment investment, one must closely check the business stage, rights relationships, expected project period, additional contributions, and surrounding market prices.