Jeonse Loan Interest Rates Expected to Exceed 5% Within the Year... What About the Interest Burden on Actual Users? (Comprehensive)

Banks Rapidly Raise Loan Interest Rates Amid Government Jeonse Loan Regulations
Already Entered 4% Range... Expected to Surpass 5% with Base Rate Hike
Significant Increase in Interest Burden for Genuine Buyers Including Prospective Couples

[Image source=Yonhap News]

[Asia Economy Reporters Jin-ho Kim and Moon Jae-won] Prospective bride Kim Hee-joo (34, pseudonym) recently visited a commercial bank to find a jeonse (long-term lease) house ahead of her wedding next spring, only to experience a frustrating situation. During the initial consultation, she was informed that the interest rate would be 2.9% per annum, but when she tried to apply the next day, the rate had risen to 3.55% per annum. Kim strongly protested, saying it was unreasonable to have to pay an additional 160,000 won in monthly interest within just one day. However, the bank employee told her that if she did not want to take the loan, she should consult another bank.

The interest rates on jeonse loans at major commercial banks have surged by 1 percentage point within just a month, reaching the mid-4% range. This is due to banks applying stricter standards, such as abolishing preferential interest rates to curb speculative demand, under pressure from financial authorities to regulate the total volume of household loans. Especially with the Bank of Korea’s base rate hike this month now a foregone conclusion, analysts say it is only a matter of time before rates surpass 5%. Since jeonse loans were excluded from additional household debt measures, there is concern that demand for purchases will shift to the jeonse market, further increasing borrowers’ interest burdens in the future.

According to the financial sector on the 1st, the upper limit of jeonse loan interest rates at major commercial banks (KB Kookmin, Shinhan, Hana) exceeded 4% by the end of last month. KB Kookmin Bank recorded rates between 3.36% and 4.36% per annum, Shinhan Bank between 3.11% and 4.01%, and Hana Bank between 3.19% and 4.49%.

Since the low interest rate trend continued after COVID-19, jeonse loan interest rates had been maintained in the 2% range. Even after the base rate was raised once this year, the upper limit of loan interest rates remained only in the mid-3% range.

However, the situation changed rapidly in the second half of this year as jeonse loans were identified as the main cause of the surge in household loans. To respond to total household loan volume regulations, banks have raised preferential interest rates or increased additional interest rates, causing the 2% range rates to disappear completely. KB Kookmin Bank reduced preferential interest rates by 0.15 percentage points in September, and Shinhan Bank increased additional interest rates by 0.2 percentage points in the same month.

Loan Interest Rates Surge... Growing Anxiety Among Actual Demanders

On major real estate and wedding preparation communities, posts such as “When did jeonse loan interest rates rise this much?” and “I’m anxious about renewing my jeonse loan” are pouring in daily. Dissatisfaction among actual demanders who cannot borrow money from banks is growing. The problem is that not only gap investors but also prospective couples who need to find a home to live in and ordinary citizens who must move due to work issues are suffering from the sharp rise in loan interest rates.

For example, a borrower who borrowed 200 million won at 2.5% per annum earlier this year would pay 416,000 won monthly in interest, but borrowers who recently took out new or renewed jeonse loans at 3.5% must pay 583,000 won monthly, an additional 180,000 won. Annually, this amounts to about 2.16 million won. Especially since most jeonse loans have variable interest rates based on a six-month term, if the base rate rises in the future, the interest burden will inevitably increase further.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics expressed concern, saying, “Overall interest rate increases seem inevitable going forward. Since inflation is rising, discussions about the base rate will become more active, and accordingly, the loan winter will become more severe.”

As jeonse loan interest rates rise, tenants in Seoul and the metropolitan area are also feeling increased burdens. Last year’s implementation of the new lease law already reduced jeonse listings and raised deposit amounts, increasing housing costs, and now loan conditions have worsened significantly. As a result, lease transactions have sharply declined even during the autumn moving season. According to the Seoul Real Estate Information Plaza, last month’s monthly rental transactions in Seoul were 9,382, the lowest level this year. Compared to October last year (16,696 transactions), this is a 43.80% decrease. Considering that autumn is usually a busy season for monthly rental transactions, this is an unusual situation.

However, jeonse prices continue to rise. Although listings have somewhat increased, high sale prices limit the decline in jeonse prices. Expectations that jeonse demand will further increase due to pre-sale subscriptions and high sale prices are also interpreted as influencing prices. According to statistics from the Korea Real Estate Board, last week Seoul apartment jeonse prices rose by 0.13%, maintaining the same increase for three consecutive weeks. The metropolitan area (0.21%) and provinces (0.15%) show similar trends.

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