Real Estate 'Actual Demand Loans' Surpass 400 Trillion Won... Tightening Jeonse Loans That Soared 131%

5 Major Banks' Jeonse, Policy Mortgage, and Group Loan Scale 403 Trillion
Jeonse Loans Alone 124 Trillion... 131% Surge Compared to 3 Years Ago
Financial Authorities Review Jeonse Regulations in Household Debt Management Measures
Strong Real Demand Nature Raises Concerns of Impact on Homeless When Regulated

[Asia Economy Reporters Kwangho Lee and Seungseop Song] The scale of real demand mortgage loans in the real estate sector has sharply increased over the past three years, surpassing 400 trillion won. In particular, a massive demand has poured into jeonse loan products, which have a low possibility of speculation, leading the overall increase in household debt. Financial authorities, which had excluded jeonse loans from comprehensive regulations to avoid harming real demand borrowers, are now widely expected to include jeonse loans in additional regulatory measures to be announced earlier this month. However, concerns have been raised that implementing uniform loan regulations without distinguishing between real demand borrowers and low-income groups could have a greater negative impact by cutting off funding sources for vulnerable groups.

Loans with Real Demand Characteristics Soar Amid Steadily Rising House Prices

According to data submitted by the Financial Supervisory Service to Jin Sun-mi, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, the scale of jeonse, policy mortgage, and group loans from the five major commercial banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?approached 403.9 trillion won in the first half of this year. This represents an increase of 20.5 trillion won (5.3%) in six months from 383.4 trillion won at the end of last year. Compared to 2018, the scale surged by 53.9% (141.5 trillion won).

The increase was driven by jeonse loans. During the same period, the outstanding balance of jeonse loans reached 124.4 trillion won. Based on the second quarter, the growth rates were ▲39.1% in 2019 ▲31.9% in 2020 ▲26.1% in 2021, showing the steepest pace. Compared to 53.7 trillion won three years ago, it increased by 70.7 trillion won, a 131.6% surge. During this period, policy mortgages and group loans also grew by 45.5% and 25.4%, respectively.

In terms of scale, group loans were the largest. Group loans are products executed collectively for borrowers moving into reconstruction or newly supplied apartments who meet certain conditions. They recorded 151.4 trillion won in the first half of this year, accounting for 37.4%. However, their share has decreased from about half of the total pie in 2018, due to the increase in the share of jeonse loans from 20.4% to 30.7%.

These products are difficult to use for speculative purposes and have strong real demand characteristics. Most borrowers are low-income households without home ownership. Jeonse loans require submission of a contract deposit receipt of at least 5%, a lease contract with a fixed date, and a copy of the landlord’s bankbook for loan execution. For interim payment group loans, about 70% are typically executed for non-homeowners. Registration must be prioritized, and loans are not possible for apartment sales priced above 900 million won. Policy mortgages generally target youth, newlyweds, non-homeowners, and low-income groups. This is why concerns arise that financial authorities’ regulations could cause significant harm to vulnerable groups.

Experts also worry about the negative effects of high-intensity loan regulations. Oh Jung-geun, president of the Korea Financial ICT Convergence Society, pointed out, "Uniform loan regulations push those who need living expenses out of the formal financial sector," adding, "Restricting only the total volume while leaving the causes such as rising real estate prices and economic difficulties unchanged will have serious side effects."

‘Jeonse’ Regulation Also Considered in New High-Intensity Household Debt Measures

Despite these concerns, the government is considering including jeonse loan regulations in the high-intensity household debt management measures to be announced shortly after the national audit. This is the first time the government is regulating jeonse loans for non-homeowners. In the September 13, 2018 measures, jeonse loans were banned for multiple homeowners, but non-homeowners were not affected, partly to avoid public backlash. Although it is a difficult choice to impose jeonse loan regulations ahead of the presidential election, it is seen as an inevitable decision to curb rising house prices and household debt.

Ko Seung-beom, chairman of the Financial Services Commission, recently told reporters, “Jeonse loans are real demand loans, so they need to be examined carefully, but there are parts that have increased due to favorable conditions,” adding, “There are criticisms that the interest rates and conditions are advantageous, so we will comprehensively review those aspects.”

The government is expected to induce an increase in jeonse loan interest rates. One method is to reduce the guarantee limit on jeonse loans. Jeonse loans are guaranteed 90-100% by guarantee institutions such as the Korea Housing Finance Corporation, SGI Seoul Guarantee, and the Korea Housing & Urban Guarantee Corporation, which results in low interest rates. According to the Bankers Association, as of the third week of September, the average interest rates on jeonse loans guaranteed by the Housing Finance Corporation at the five major commercial banks ranged from 2.64% to 3.03%. If the guarantee limit is reduced, banks will bear more risk and will have no choice but to raise interest rates. Loan screening will also become stricter, potentially reducing loan limits.

Financial authorities regard KB Kookmin Bank’s jeonse loan management measures as a model case. On the 16th of last month, Kookmin Bank reduced preferential interest rates on jeonse loans and stopped refinancing loans. Loan limits were also restricted within the range of the increase in jeonse prices. Measures such as requiring a funding plan when applying for jeonse loans or having borrowers repay existing overdraft loans when executing jeonse loans are also being discussed.

A financial authority official said, “We are considering various measures to curb the increase in jeonse loans in a way that minimizes the impact on real demand borrowers.”

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