[Insight & Opinion] More Discussion Needed on 'Special Loans' That Circumvent the DSR

Special Loans That Ignore DSR Spark Debate
Concerns Over Reverse Jeonse and Market Destabilization Grow

In September 2022, nationwide unsold housing units increased from 32,000 to 40,000, prompting the government to begin implementing policies to boost housing prices. Among these, the most immediately effective policy was the introduction of the special BoGeumJaRi loan, known as the 'policy mortgage.' Unlike the standard BoGeumJaRi loan, which had income and housing price limits of up to 600 million KRW, the special loan removed income restrictions and expanded eligibility to homes priced up to 900 million KRW. It also debuted earlier this year with attractive terms such as a maximum 50-year maturity and zero prepayment penalties. The budget allocated for the special BoGeumJaRi loan exceeded 40 trillion KRW, which is about half of the average annual household loan increase (80 trillion KRW) in the 2010s. Considering that over 30 trillion KRW was used up in the first half of the year alone, this scale indicates that lending was proceeding at a level similar to normal years. Although household loan statistics are based on executed amounts and thus underestimate actual application volumes, the fact that a significant rebound began in February alongside the implementation of this policy demonstrates the power of the special mortgage loan.

Fundamentally, the significance of the special mortgage loan lies in its ability to circumvent the Debt Service Ratio (DSR), a key component of the strengthened household loan management measures introduced in 2021. This shows that the policy was introduced to quickly stimulate the market as housing price declines after September 2022 began to accelerate faster than expected.

Looking ahead to the second half of the year, one of the biggest anticipated risks in the housing market is reverse jeonse (reverse key money deposit). The Bank of Korea, in its June Financial Stability Report, projected that if jeonse prices remain at March levels, a total of 24.2 trillion KRW in deposit repayments will occur this year alone, which is about 8% of the total jeonse deposits of 288 trillion KRW maturing during the same period. Typically, jeonse deposits increase with each two-year contract renewal, but in the fourth quarter of 2022, reverse jeonse occurred for the first time, albeit on a very small scale, increasing from 3.9 trillion KRW in the first quarter to 7.7 trillion KRW in the fourth quarter. The scale of reverse jeonse is expected to vary depending on whether jeonse prices fall or rise compared to March in the second half of this year.

If reverse jeonse intensifies, landlords unable to return tenants' deposits due to financial difficulties may sell their properties, triggering further sales and destabilizing the real estate market. Therefore, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho has advocated for the necessity of a special reverse jeonse loan, warning that reverse jeonse could reach 100 trillion KRW. However, there is considerable opposition to allowing such special reverse jeonse loans, as they may lead to moral hazard in the market and encourage investors to shield themselves from losses in the housing market.

However, a more fundamental issue is that whether or not special loans are implemented, these challenges are inevitable. This is because these special loans essentially represent 'excessive borrowing relative to income.' Both the special mortgage loans in the first half and the special reverse jeonse loans in the second half of this year do not consider the DSR. Unlike regular loans, these special loans result in borrowing that exceeds the DSR calculated based on principal and interest repayment assumptions. This conceptually involves drawing on future income in advance, meaning that once the era of special loans ends, a demand gap may occur equivalent to the amount of future demand that was pulled forward under normal circumstances.

It is the duty and fundamental stance of government authorities to use policies to manage immediate crises. No government has ever intentionally driven the market into crisis. However, whether the solution should involve permitting loans that exceed income requires further social discussion at this point.

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