Most End-Users Are Ordinary People... Will There Be Regulation on Jeonse Loans After a 131% Surge? (Comprehensive)

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

Real estate stock photo / Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Song Seung-seop] The scale of real demand loans for real estate 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 impacting real demand borrowers, are now widely expected to include jeonse loans in the 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.

Real demand loans 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 marks 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 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.

By 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 funds and have a strong real demand nature. Most of the 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 earners. This is why concerns arise that financial authorities’ regulations could cause significant harm to vulnerable groups.

Nevertheless, commercial banks are severely tightening related loans to avoid exceeding the government’s household loan volume regulation limits. Except for Shinhan Bank, commercial banks currently have double-digit growth rates in jeonse loans. Nonghyup Bank temporarily suspended real estate-related loans, including jeonse loans, as early as August. Hana Bank’s loan recruitment corporations are reportedly temporarily suspending household loans such as jeonse and mortgage loans until the end of October due to exhausted limits.

Experts express concerns about the negative effects of high-intensity loan regulations. Oh Jung-geun, president of the Korea Financial ICT Convergence Society, said, "Uniform loan regulations push those who need living expenses out of the formal financial sector," adding, "Simply restricting the total volume while leaving the causes of rising real estate prices and economic difficulties unchanged will have significant side effects."

‘Jeonse’ regulation also considered in new high-intensity household debt measures

Financial authorities attending the 'Macroeconomic Financial Meeting' held on the 30th at the Bankers Hall in Jung-gu, Seoul, greet each other before the meeting. From the left, Eunbo Jeong, Governor of the Financial Supervisory Service; Seungbeom Go, Chairman of the Financial Services Commission; Namgi Hong, Deputy Prime Minister and Minister of Economy and Finance; and Juyeol Lee, Governor of the Bank of Korea. Photo by Jinhyung Kang aymsdream@

Despite these concerns, the government is considering including jeonse loan regulations in the high-intensity household debt management measures to be announced immediately after the national audit. This would be the first time the government regulates jeonse loans for non-homeowners. While the 2018 September 13 measures banned jeonse loans for multi-homeowners, non-homeowners were not affected. This was to avoid a backlash from public opinion. 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.

Financial Services Commission Chairman Ko Seung-beom recently told reporters, "Jeonse loans are real demand loans, so they need to be examined carefully, but there has been an increase due to favorable conditions," adding, "There are criticisms that the interest rates and conditions are advantageous, so we will comprehensively review those aspects." However, he also noted, "No specific plan has been finalized yet, and we are in the process of reviewing various issues," and "We are looking at how to include it in household debt measures and the real demand borrower aspects."

The government is expected to induce an increase in jeonse loan interest rates. One method is to reduce the guarantee limit for jeonse loans. Jeonse loans are guaranteed 90-100% by guarantee institutions such as the Korea Housing Finance Corporation, SGI Seoul Guarantee, and the Housing and 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 Korea Housing Finance Corporation at the five major commercial banks ranged from 2.64% to 3.03%. If the guarantee limit is reduced, the risk borne by banks increases, forcing them 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 jeonse price increases. Other measures under consideration include requiring a funding plan when applying for jeonse loans or requiring borrowers to repay existing overdraft loans when executing jeonse loans.

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.