[In-Depth Look] The KF94 of the Housing Market, Do You Know About the Installment Repayment Jeonse Loan?

Kwon Oh-hoon, President of the Korea Housing Finance Corporation Housing Finance Research Institute

[Asia Economy Reporter Park Sun-mi] Recently, my two daughters in their late 20s, who just finished their studies, said they would not get married and would continue living with my spouse and me. Now, they say that independence is a luxury and change the subject. They seem overwhelmed by the idea of securing a home on their own and feel too embarrassed to ask their parents for help. Whether this is unfortunate or fortunate is a matter of value confusion.

According to the Ministry of Land, Infrastructure and Transport's housing status survey, about 14% of households owning their homes acquired them through gifts or inheritance. Additionally, households that received support from parents or others reported receiving 50.1% of their home purchase funds and 80.8% of their rental deposit funds from such support. In Korean society, which is at the center of aging, the parent generation, who must prepare for old age and also provide parental assistance, cannot rest even after retirement.

Moreover, since it is common that some cannot expect such parental assistance or lack sufficient support to secure living space, when children reach the time to become independent, distance sometimes arises between parents and children. That frustration resembles our situation living through the COVID-19 pandemic era. It also resembles the fact that while a definite vaccine is needed, a commercially available vaccine has yet to be developed.

We cannot just give up on marriage and childbirth or remain idle simply because we cannot secure housing. If there is no parental chance, there is a loan chance. Although it is not the best but the second-best option. The idea of not taking out a loan while renting is out of touch with reality. Talking about a single-room for the younger generation these days is not just distancing but widening the gap. Even for the so-called 'Latte generation,' like myself, the start of newlywed life was in an apartment, so I have no complaints.

Most jeonse (long-term lease) loans have a loan period matching the lease term, usually two years, and since there is no house collateral, they are lump-sum repayment loans that must be repaid in full at the end of the loan period, similar to unsecured loans. You pay only interest monthly, but if the jeonse price rises after two years, you have to take out another loan to cover the increase. Otherwise, you have to move to a less desirable place. Because of this, young newlyweds not only fail to build assets but also increase their sighs in proportion to the rising loan amounts. The sweet and hopeful newlywed life soon becomes infected with anxiety and dissatisfaction.

Recently, a new installment repayment type jeonse loan has been introduced. While you still pay the loan interest monthly, you also repay the principal, which is why it is called an installment repayment type.

Considering that the loan term is relatively short (usually 2 to 4 years) and that young people often have limited repayment capacity, the principal repayment ratio can be set starting from 5% of the loan principal. If you have more capacity, you can repay 10% or 20% instead of 5%.

You might say, "How can I prepare a lump sum when I can barely pay the interest?" or "If I have extra money, I can just save and withdraw later, so why bother repaying the loan?" but it is worth considering.

The first advantage is the high-interest, tax-free savings function. Due to the low-interest environment, most bank savings accounts offer interest rates in the 1% range, and taxes are due at maturity. Since the interest rate on this jeonse loan is 2-3%, repaying it is equivalent to a high-interest, tax-free savings account. You can even receive income tax deductions at year-end tax settlement, which is like a year-end bonus. The income deduction for interest-only jeonse loans was very small. The principal repaid in installments is also eligible for income deduction, with a deduction limit of 6 million KRW, which is a considerable amount. Beyond tax exemption, it is a perfect tax refund.

The second is the forced savings function. People tend to spend money when they see it, so unless they have strong determination, it is not easy to save regularly every month. Choosing to exercise at a gym or study at a library or cafe instead of staying at a comfortable home is essentially buying self-discipline or willpower. Although monthly repayments may be burdensome compared to paying interest only, when the loan period ends, you will have a lump sum from the reduced loan amount returned by the landlord. If you link your salary to automatic transfers to the loan account, you can repay the loan while effectively saving at the same time.

Winter has come again without fail this year. The recent instability in the housing market feels as cold as winter for those without homes and as frightening as COVID-19. The whole world has been infected by COVID-19 for a long time. This infectious disease, which came faster and stronger than expected, was a source of fear. Thanks to voluntary self-quarantine, that fear has fortunately settled into anxiety. The undisputed hero is the mask. The discomfort and suffocation of wearing masks are bearable with the hope for a vaccine. We hope that the installment repayment type jeonse loan will become a premium mask for young couples just starting to climb the housing ladder, waiting for the vaccine.

This content was produced with the assistance of AI translation services.