Kallikrein-related peptidase 5 (KLK5) is a promising therapeutic target in several skin diseases, including Netherton syndrome, and is emerging as a potential target in various cancers. In this study, we used a sparse matrix library of 125 individually synthesized peptide substrates to characterize the binding specificity of KLK5. The sequences most favored by KLK5 were GRSR, YRSR and GRNR, and we identified sequence-specific interactions involving the peptide N-terminus by analyzing kinetic constants (kcat and KM) and performing molecular dynamics simulations. KLK5 inhibitors were subsequently engineered by substituting substrate sequences into the binding loop (P1, P2 and P4 residues) of sunflower trypsin inhibitor-1 (SFTI-1). These inhibitors were effective against KLK5 but showed limited selectivity, and performing a further substitution at P2' led to the design of a new variant that displayed improved activity against KLK5 (Ki=4.2±0.2 nm), weak activity against KLK7 and 12-fold selectivity over KLK14. Collectively, these findings provide new insight into the design of highly favored binding sequences for KLK5 and reveal several opportunities for modulating inhibitor selectivity over closely related proteases that will be useful for future studies aiming to develop therapeutic molecules targeting KLK5.