[Practical Finance] Loan Limits Tighten Due to Interest Rate Hikes... Should You Try 'Bogeumjari Loan'?

Launch of 40-Year Maturity Bogeumjari Loan for Youth and Newlyweds
Increased Loan Limits and Extended Terms Reduce Monthly Repayments
Fixed Interest Rate Also Mitigates Risk of Rising Interest Burden

[Asia Economy Reporter Song Seung-seop]Yang Cheol-jin (31 years old, pseudonym) and Kim Seon-jin (34 years old, pseudonym), who are getting married next month, plan to purchase a newlywed home worth 430 million KRW. They currently need an additional loan of 200 million KRW and are looking for ways to minimize the principal and interest repayment burden. This is because they need to accumulate a bit more capital to move to a newly built apartment near an elementary school in five years.

Byun Jin-won (33 years old, pseudonym) is a borrower who has been repaying a high-interest mortgage loan for over five years. The current loan balance is about 350 million KRW. Earlier this year, he learned about the low-interest mortgage loan product called Bogeumjari Loan through a friend's recommendation and tried to refinance, but was told the maximum loan limit is 300 million KRW. To apply for refinancing with the Bogeumjari Loan, he would need to find an additional loan for the remaining 50 million KRW, leaving him stuck in a dilemma.

The Bogeumjari Loan is gaining attention as a financial tip to ease the high housing cost burden. Starting from July, loan support will be further strengthened for low-income and actual demand borrowers. It is expected that concerns about insufficient loan limits to secure desired funds or having to pay high interest even when using the Bogeumjari Loan will be somewhat alleviated.

Monthly Interest Burden Decreases When Using 40-Year Maturity Bogeumjari Loan

According to the Korea Housing Finance Corporation on the 21st, the Bogeumjari Loan system, which will be implemented from this month, has been improved. The main focus is on strengthening financial support and expanding options for low-income and actual demand borrowers. The key measures are extending the loan term and lowering monthly repayment amounts.

Youth under 39 years old and newlywed households can now use the ultra-long-term 40-year maturity Bogeumjari Loan. This ultra-long-term policy mortgage is a product designed to support young people who currently lack sufficient assets to purchase a home but have a high potential for future income growth. Couples who meet the eligibility criteria can also apply for the 40-year maturity product.

Previously, the maximum term for policy mortgages was 30 years. Adding 10 more years reduces the monthly principal and interest repayment burden. This increases options for those who want to lower fixed monthly expenses. Borrowers considering refinancing or moving can use the 40-year mortgage to pay less interest while accumulating capital. Later, after selling their existing home, they can repay the remaining principal of the Bogeumjari Loan.

The eligibility for youth under 39 and newlywed households is determined based on the date the loan application is completed. Newlywed households are defined as those whose marriage registration date on the marriage certificate is within 7 years from the application date. Households planning to marry within 3 months from the application date, as evidenced by a wedding invitation or venue contract, are also recognized. Submission of a separate marriage plan confirmation document can also be accepted. Additionally, the loan application must be made by a borrower aged 39 or younger.

Carefully Review Interest Rate Conditions That Vary by Product

Interest rate conditions vary slightly by product. Looking at the Bogeumjari Loan interest rates by maturity for July, the 40-year maturity loan rate is 3.0% when using U Bogeumjari Loan or t Bogeumjari Loan. This is 0.05 percentage points higher than the 30-year maturity rate. Compared to the 10-year maturity rate (2.70%), it is 0.3 percentage points higher. If using the electronic contract product Akim e-Bogeumjari Loan, the 40-year maturity loan can be obtained at a 2.90% interest rate. In this case, the rates are also 0.05% and 0.3% higher than the 30-year and 10-year maturities, respectively.

However, even if choosing the somewhat higher interest 40-year loan maturity, monthly repayments decrease because the repayment is spread over 10 more years compared to the 30-year maturity. For example, if borrowing 200 million KRW (LTV 70%) with a 30-year maturity Bogeumjari Loan to purchase a 280 million KRW home, the monthly principal and interest repayment would be 827,114 KRW under equal principal and interest repayment. But with a 40-year maturity loan, the monthly repayment decreases by 122,624 KRW (14.8%) to 704,490 KRW.

The same applies when choosing the equal principal repayment method. With a 40-year maturity loan, the average monthly repayment is 658,854 KRW, which is 134,884 KRW (17.0%) less than the 793,738 KRW monthly repayment for a 30-year maturity loan.

Another advantage is the fixed interest rate benefit. This helps eliminate the risk of increased interest burden during periods of rising interest rate pressure. Voices inside and outside the Bank of Korea are calling for raising the base interest rate to manage fluctuating liquidity and improve soundness. As the US and other advanced countries raise their base interest rates following COVID-19 recovery, Korea may also raise rates to prevent capital outflow. If a 40-year long-term loan is executed, borrowers do not need to worry about increased monthly repayments due to future base rate hikes.

The loan limit has increased from 300 million KRW to 360 million KRW. Previously, some avoided the Bogeumjari Loan due to insufficient limits despite being eligible for a loan exceeding 300 million KRW with a 70% loan-to-value ratio (LTV). However, as LTV is preferentially applied to low-income and actual demand borrowers in private mortgage loans as well, the Bogeumjari Loan limit has also been increased by 60 million KRW.

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