Acceleration of 3rd Safe Conversion Loan... Less Attractive than 1st and 2nd Rounds

Interest Rate Conversion for Homes Under 400 Million Won in September
Up to 900 Million Won 'General Type' Support Next Year
Higher Interest Rates and Stricter Requirements Than Before

[Asia Economy Reporter Song Hwajeong] The ruling party and the government have decided to swiftly implement the third round of the Safe Conversion Loan in September, which converts variable-rate mortgage loans into long-term fixed-rate loans. However, analyses suggest that this third round is less attractive compared to the first and second rounds.

3rd Safe Conversion Loan to be Implemented in September

According to financial authorities on the 18th, at a high-level ruling party-government meeting held the previous day, it was decided to convert variable interest rates to fixed rates in September for mortgage loans on homes valued under 400 million KRW, considering the impact of recent interest rate hikes.

The third Safe Conversion Loan this time is planned at a total scale of 45 trillion KRW, with 25 trillion KRW allocated for the second half of this year and 20 trillion KRW for next year. Support is divided into a ‘general type,’ which supports homes priced up to 900 million KRW in order of lower price, and a ‘preferential type,’ which offers additional interest rate benefits to low-income borrowers with homes priced under 400 million KRW. The preferential type targets variable-rate mortgage loans from primary and secondary financial institutions. It is aimed at couples with combined income under 70 million KRW, allowing conversion to a fixed rate up to 0.3 percentage points lower than the current Bogeumjari Loan rate at the time of loan, within a maximum limit of 250 million KRW. The general type has no income restrictions and allows conversion to a fixed rate 0.1 percentage points lower than the Bogeumjari Loan within a 500 million KRW limit. The preferential type will be converted this year, and the general type next year.

Kim Joo-hyun, Chairman of the Financial Services Commission, explained, "As of July, the Bogeumjari Loan interest rate ranges from 4.2% to 4.8%, and with preferential benefits applied, the effective rate is expected to be in the low 4% range. Although rates are rising and the actual rate in September will be somewhat higher, considering the loan interest rates at commercial banks, this will be of significant help."

Benefits Less Favorable Compared to 1st and 2nd Rounds

This Safe Conversion Loan being implemented is the third, following the 2015 Safe Conversion Loan and the 2019 Low-Income Safe Conversion Loan.

The first Safe Conversion Loan targeted borrowers with bank mortgage loans on homes priced under 900 million KRW and loan balances under 500 million KRW, with interest rates set between 2.55% and 2.65%. This rate was a groundbreaking level, even lower than the variable rates in the low 3% range at that time. In 2015, the Bogeumjari Loan interest rate was around 3.0% to 3.35%. The first Safe Conversion Loan, supplied on a first-come, first-served basis with a 20 trillion KRW limit, was fully subscribed within four days of launch. An additional 20 trillion KRW was supplied over the next five days, bringing the total for the first and second rounds to 31.7 trillion KRW.

In 2019, the ‘Low-Income Safe Conversion Loan’ was supplied, converting variable-rate mortgage loans to fixed rates as low as the 1% range annually. The basic eligibility was for one-home owners with combined household income under 85 million KRW. The base interest rate ranged from 1.85% to 2.20% depending on maturity, the lowest among mortgage loans available at the time. The Bogeumjari Loan rate then was 2.0% to 2.35%. Due to high demand at low rates, the eligibility cutoff was set at homes priced under 270 million KRW, with benefits concentrated in relatively lower-priced non-metropolitan areas. The refinancing applications exceeded 74 trillion KRW, more than three times the target supply of 20 trillion KRW.

The third Safe Conversion Loan being implemented now has higher interest rates compared to the first and second rounds, and considering recent home price increases, the eligibility criteria are stricter than the previous rounds, which were executed with a 900 million KRW market price limit.

Regarding criticism that the ‘under 400 million KRW’ criterion is too low, financial authorities plan to implement the program first and then adjust as needed. A Financial Services Commission official stated, "When executing the 25 trillion KRW supply starting from lower-priced homes, the cutoff is estimated to be around under 400 million KRW. If the 25 trillion KRW is not fully allocated under 400 million KRW, the limit will naturally expand upward, reflecting opinions for expansion."

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