"No Guarantee"... Caution Urged on Loans for Pre-Sale Reservation Deposits in Private Rental Housing

Concerns are mounting over potential consumer harm regarding the so-called 'pre-sale reservation system' in the private rental housing market, prompting a call for caution.

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On April 13, the Financial Supervisory Service cautioned consumers, noting that although private rental housing is intended for long-term leases to stabilize the housing market, some businesses are encouraging the payment of a 'pre-sale reservation deposit' on the condition of conversion to sale after the mandatory rental period.

The key issue is that, unlike rental deposits, this pre-sale reservation deposit is based on a private contract between individuals, and therefore does not grant priority repayment rights under the Housing Lease Protection Act and is not covered by HUG guarantees. If the rental operator goes bankrupt, it may be difficult to recover the deposit, which could result in significant consumer losses.

In response, the Ministry of Land, Infrastructure and Transport also sent an official notice to local governments in 2023, asking them to provide guidance to prevent such pre-sale reservation practices, and warned against customs that run counter to the intent of the system.

Particularly online, exaggerated advertisements are spreading, claiming that the pre-sale reservation deposit can be covered through jeonse loans and similar products. Some even suggest that up to 90% of funds can be raised using financial institution loans, but this may encourage excessive leverage and could result in losses for consumers.

The Financial Supervisory Service also warned that a large financial burden may occur all at once during the process of transferring ownership after the rental period ends.

Even if a pre-sale reservation contract is signed using jeonse loans or similar financing, when refinancing with a mortgage loan at the time of conversion to sale, the loan limit may be reduced due to DSR (Debt Service Ratio) and LTV (Loan-to-Value) regulations. In such cases, borrowers may face liquidity risks, being forced to repay the shortfall in a lump sum.

If repayment fails, this leads to delinquency, which can quickly escalate into a serious credit risk.

The Financial Supervisory Service stated, "Ultimately, consumers should be wary of promotions such as 'you can sign a contract now because you can get a large loan.' At the time of ownership transfer and conversion to sale, loan amounts may be reduced depending on housing prices and applicable regulations, so it is essential to verify these factors in advance."

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