Announcement of Additional Regulations on Jeonse Loans... Targeting Ultra-High-End Properties Over 1.5 Billion Won

Financial Authorities and SGI Seoul Guarantee Consider 'Suspension of Guarantees' for Ultra-High Jeonse Loans
Jeonse Loans Expected to Tighten Further from Next Year... Signs of Expanding 'Installment Repayment' with Principal Repayment

[Image source=Yonhap News]

[Asia Economy Reporter Kim Jin-ho] Additional regulations on jeonse loans are expected to be announced soon. The target is likely the so-called 'ultra-high-priced jeonse loans' exceeding 1.5 billion KRW. This measure is interpreted as a precaution against the risk of further housing price increases, as jeonse contracts with deposits over 1.5 billion KRW have been rapidly increasing, especially in Seoul.

On the 13th, Ko Seung-beom, Chairman of the Financial Services Commission, said in a recent meeting with reporters, "SGI Seoul Guarantee Insurance, which has raised concerns about ultra-high-priced jeonse loans, is planning to review (the suspension of guarantees)."

Currently, there are three financial institutions that guarantee jeonse loans. Public institutions such as the Korea Housing Finance Corporation and the Housing and Urban Guarantee Corporation (HUG) provide guarantees only for jeonse deposits below a certain amount, whereas the private company SGI Seoul Guarantee does not set any limit.

The threshold for restricting jeonse loans is expected to be above 1.5 billion KRW. The ban on mortgage loans applies to amounts exceeding 1.5 billion KRW. Initially, the standard was expected to be above 900 million KRW, but Chairman Ko explained, "Since jeonse contracts exceeding 900 million KRW have also increased, the review will be conducted at a much higher level."

The implementation timing is likely as early as next month or as late as next year. Since the government plans to implement principal installment repayment for jeonse loans starting next year, it is more likely to be enforced in line with this. It is expected to apply only to new loans, excluding existing borrowers.

The financial authorities' announcement of regulations on ultra-high-priced jeonse loans is analyzed as a response to recent unusual signs in the housing market. It is interpreted as a strong intention to curb ultra-high-priced jeonse loans first to prevent soaring jeonse prices from naturally leading to increases in sale prices.

According to the Ministry of Land, Infrastructure and Transport's apartment transaction price system, the number of apartments in Seoul with deposits exceeding 1.5 billion KRW from January to October this year was 53, a roughly 18-fold increase compared to 3 in 2018.

The still large increase in household loans is also believed to have influenced this. The outstanding household loans at the five major commercial banks reached 706.3258 trillion KRW last month, an increase of 3.438 trillion KRW from the previous month. Despite strengthened household debt management measures, the rapid increase in mortgage loans, including jeonse loans, has had an impact.

However, concerns have been raised that restricting ultra-high-priced jeonse loans could accelerate the shift from jeonse to monthly rent or semi-jeonse. The practice of borrowing jeonse loans up to the guaranteed limit and covering the rest with monthly rent may become entrenched, further burdening actual users. A financial sector official said, "The conversion of jeonse to monthly rent or semi-jeonse could accelerate, especially in the metropolitan area," adding, "Those planning to move to areas like Daechi-dong or Mok-dong for their children's education will face deeper concerns."

Meanwhile, tightening of jeonse loans is expected to become more active starting next year. The financial authorities plan to expand preferential allocation of policy mortgages to financial companies that excel in installment repayment of jeonse loans from next year.

Accordingly, KB Kookmin Bank recently imposed a '5% installment repayment' condition on some new jeonse loans. NH Nonghyup Bank, Shinhan Bank, and regional banks are also reportedly deliberating whether to mandate installment repayment for jeonse loans.

If installment repayment is applied to jeonse loans, the borrower's burden will increase significantly. For example, if borrowing 200 million KRW at an annual interest rate of 3.5% for two years, previously the borrower only had to pay interest of 583,000 KRW on the principal, but if repaying 5% of the principal (4.16 million KRW) simultaneously, the burden nearly doubles.

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