"Neck-Straining Jeonse Living... Loan Interest Rates Soar to 6%"

Commercial Banks' Jeonse Loan Interest Rates Exceed 6%
Interest Burden Snowballs... 7% Possible in August
Loans Focused on Actual Demand... Interest Rates Higher Than Mortgage Loans

On the 17th, a view of apartments was seen from Lotte World Tower Seoul Sky in Songpa-gu, Seoul. The Korea Real Estate Board announced that the actual transaction price index for apartment sales in Seoul in March was 175.1, up 1.4 points from the previous month (173.7). This marks the first time in five months since recording 180.0 in October last year that the Seoul apartment sales actual transaction price index has turned upward again. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Sim Nayoung] Cha Hyunmin (41, pseudonym), who lives in a rented apartment in Dobong-gu, Seoul, grabbed the back of his neck twice ahead of his lease renewal in August. Once upon hearing that the jeonse deposit, which had been fixed at 350 million won for four years, had increased to 600 million won, and again upon hearing that the jeonse loan interest rate had jumped from 2.6% to 4.2%. If he signs the contract under these conditions, the loan amount Cha must bear is 400 million won. The monthly interest alone amounts to 1.36 million won. There was no choice but to convert the jeonse into a monthly rent.

Cha said, "The jeonse loan interest rate has risen too much, so I finally negotiated with the landlord to pay a deposit of 300 million won and a monthly rent of 1.1 million won." Although monthly rent is also money lost, the fact that it is fixed for two years was somewhat comforting. Cha sighed, "If the Bank of Korea raises the base interest rate two or three more times by the end of the year, the jeonse loan interest rate will inevitably rise as well. Jeonse is mainly for actual users, but if interest rates rise like this, how are ordinary people supposed to live?"

COFIX Surges, Pushing Up Jeonse Interest Rates
Possibility of 7% Range in August

The interest rates on jeonse loans, which are centered on actual users, have exceeded 6%, causing the burden on ordinary people to snowball. Jeonse deposits in Seoul and the metropolitan area have risen by hundreds of millions of won over the past two years, putting tenants under pressure, and interest rates have also increased. According to the financial sector on the 29th, the interest rates on jeonse loans from the five major banks (KB Kookmin, Shinhan, Hana, Woori, Nonghyup) reached 3.87% to 6.22% as of the 28th. This is 2.35 percentage points higher than the upper limit of 2.46% to 3.87% at the end of July last year.

The upper limit of jeonse loan interest rates (6.22%) is higher than the upper limit of fixed-rate mortgage loans (6.02%) and only 0.03 percentage points lower than the upper limit of variable-rate mortgage loans (6.25%). Jeonse loans are provided with guarantees from Seoul Guarantee Insurance, Korea Housing Finance Corporation, and Housing and Urban Guarantee Corporation. Because of this, jeonse loan interest rates are generally lower than regular mortgage loans, but recently they have become higher.

[Image source=Yonhap News]

What caused this phenomenon? The benchmark interest rate for jeonse loans, COFIX (Cost of Funds Index), surged, pushing up the rates. The COFIX rate for June, announced on the 16th, was 2.38%, up 0.4 percentage points from the previous month.

An official from a commercial bank said, "Jeonse loan interest rates stayed in the 3-5% range throughout the first half of this year but collapsed in July due to the rise in COFIX," adding, "When the July COFIX, which reflects the Bank of Korea's big step (a 0.5 percentage point hike in the base rate on the 13th of this month), is announced in August, jeonse loan interest rates could jump sharply again, approaching 7%."

Commercial Banks Focus Rate Cuts Only on Mortgage Loans
Government Measures Have Limits in Reducing Jeonse Interest Burden

Although commercial banks lowered interest rates at the request of the Financial Services Commission, the focus on mortgage loans is also a reason why jeonse loan interest rates have risen further. Despite a continuous decrease in household loans from the five major banks this year, jeonse loans have increased. From January to July 20th this year, they increased by about 2 trillion won.

Considering this trend, the Financial Services Commission announced a plan to "expand low-interest jeonse loans through Korea Housing Finance Corporation." The current loan limit from Korea Housing Finance Corporation is 222 million won, but the government plans to raise it to 440 million won starting in October. However, banks predict that the effect will be limited in areas with high jeonse prices like Seoul and the metropolitan area. Korea Housing Finance Corporation loans only apply to jeonse prices below 700 million won, so they are not applicable in most parts of Seoul.

A commercial bank official explained, "Korea Housing Finance Corporation has no interest rate premium compared to Seoul Guarantee Insurance, but you have to pay tens of thousands of won in guarantee fees. Also, the loan limit from Seoul Guarantee Insurance is up to 500 million won, so there is no reason to take out a loan from Korea Housing Finance Corporation. Therefore, the government's current measures have limits in reducing the burden of jeonse living."

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