[Fact Check] Will All Villa Rental Business Owners Go Bankrupt If Jeonse Deposit Insurance Becomes Mandatory?

Mandatory Lease Business Registration and Guarantee Insurance from Today

Existing Lease Businesses Subject from Contracts After One Year
Backlash Spreads... "Can't Voluntarily Cancel, Only Increased Burden"

Government: "High-Risk Landlords Must Be Sorted This Time"
"Insurance Premiums Heavier Only for Landlords with Poor Credit or Debt"

[Asia Economy Reporter Moon Jiwon] The mandatory subscription to rental deposit guarantee insurance is causing growing backlash among long-term multi-family and multi-unit housing landlords with 8-year leases. Unlike apartments, they cannot voluntarily cancel, and the increased insurance premium burden threatens to deteriorate profitability overnight. Some landlords are appealing that it is "threatening their livelihood."

On the other hand, the government insists that this policy is necessary because many landlords have caused deposit accidents due to reckless 'gap investment.' The government explains that even if rental deposit guarantee insurance becomes mandatory, only some low-credit landlords will face increased burdens, while the burden on good landlords will hardly increase.

What about houses that cannot subscribe to rental deposit guarantee insurance?

According to current standards, if a house is under provisional seizure or has an excessively high debt ratio, subscription to guarantee insurance is restricted. For landlords who want to newly register as rental business operators, if such defects exist, the local government head may refuse the registration application. Therefore, both guarantee insurance and rental business registration become impossible.

The problem lies with existing rental business operators. Since they are already registered, they cannot avoid the law. However, they can subscribe to guarantee insurance starting from lease contracts concluded one year after the law takes effect. If they fail to resolve the causes restricting insurance subscription within one year, they may face fines up to 20 million KRW or imprisonment up to 2 years.

If they abandon the business before the lease period ends, a fine of 30 million KRW will be imposed. A Ministry of Land, Infrastructure and Transport official said, "Financial issues causing problems must be improved within one year."

How much is the insurance premium burden for villa landlords?

Guarantee insurance is a product where the insurer compensates the tenant if the landlord fails to return the deposit. Previously, insecure tenants bore the full insurance premium, but from now on, rental business operators must pay. Therefore, all rental business operators will inevitably face additional burdens ranging from tens of thousands to hundreds of thousands of KRW per unit. In some cases, the burden can be so large that households may be shaken financially.

However, the Ministry of Land, Infrastructure and Transport states that not all rental business operators will face burdens large enough to impact their livelihood. This is because the premium rate is calculated differently depending on the landlord's debt ratio and credit rating. According to the Ministry, the Housing and Urban Guarantee Corporation (HUG)'s premium rate for multi-family housing guarantee insurance ranges from 0.099% to 0.438% of the deposit (for individual business operators).

If the landlord's credit rating is high and the debt ratio of the house is 60% or less, and there is little risk of the tenant failing to recover the deposit later, a premium rate of 0.099% applies. Conversely, if the landlord's credit rating is low and the debt ratio exceeds 100%, a higher premium rate applies, increasing the landlord's burden accordingly.

What is the actual insurance premium burden?

For villas or other multi-family housing with a deposit of 200 million KRW, the guarantee premium for a 2-year subscription is about 400,000 to 1,750,000 KRW. If credit and debt ratios are good, it is about 200,000 KRW per year. If certain conditions are met, the subscription can be based on the amount obtained by subtracting 60% of the house price from the sum of the secured amount on the rental house and the deposit, not the full rental deposit, so the burden may be reduced in some cases.

A Ministry official said, "If the house is really risky, the landlord's insurance premium burden can be large. If the ratio of senior claims and rental deposit to the house price far exceeds 100%, guarantees generally are not issued. Such houses are a loss even for HUG and others to insure, so the premium is expensive." He added, "It is not right to shift all risks to tenants without improving one's financial situation and then claim inability to pay premiums."

In other words, the Ministry explains that landlords with large burdens are those who pose higher risks to tenants, so they should take this opportunity to safely organize their financial situation.

Will conflicts between tenants and landlords over premium burdens escalate?

The insurance premium is set so that rental business operators pay 75% and tenants pay 25%. The landlord pays the full premium first and then collects 25% from the tenant. If the tenant did not intend to subscribe to the guarantee insurance, they will have to bear additional costs, which may cause disputes. One landlord expressed concern, saying, "Conflicts may arise over the insurance premium burden."

If tenants do not want to subscribe to guarantee insurance, they have no choice but to find houses where the landlord is not a rental business operator. A Ministry official said, "If tenants feel burdened by sharing insurance premiums when signing lease contracts, they can choose general houses rather than registered rental houses." He added, "However, since tenants previously bore 100% of the cost and now only 25%, and can live in safer houses, cases of disputes or lawsuits between landlords and tenants over insurance premiums are unlikely to be frequent."