Tightening Household Loans... 'Last Resort' Bogeumjari Loan Balloon Effect

Lower Interest Rates and Higher Limits than Commercial Banks... LTV Regulation Also at 70%
Concerns Raised in 2016 About Suspension of New Transactions

[Image source=Yonhap News]

[Asia Economy Kim Jin-ho] Sunwoo Hyun (36, pseudonym), who works at a large corporation, has lost motivation to work due to soaring housing prices. Despite working hard for the past few years, the rising housing prices show no signs of slowing down, and the continuous home purchases by acquaintances have made him even more discouraged. After much consideration, Sunwoo decided to visit sites on the outskirts of Seoul to purchase an apartment. As a young professional, he does not have much savings yet, but he believes it will be possible if he receives as much policy mortgage support as possible.

The policy financial product, the Bogeumjari Loan, is gaining attention as the "last bastion" for homebuyers, attracting a large number of applicants. While financial authorities have tightened household loan regulations mainly through commercial banks, the lower interest rates and higher limits compared to banks are expected to increase demand among young genuine buyers. However, since the government’s determination to curb the household debt growth rate is stronger than ever, there are concerns that if a balloon effect of concentrated loan demand becomes evident, the handling of the loan may be suspended again as in the past.

According to the financial sector on the 29th, the supply amount of Bogeumjari Loans reached about 17 trillion won by August this year. This is a similar growth rate to last year’s record high (about 26.6 trillion won). Considering the autumn moving season starting in September, if the supply increases by about 2 trillion won per month on average, the annual supply amount for this year is estimated to be around 25 trillion won.

The Bogeumjari Loan, handled by the Korea Housing Finance Corporation, is a fixed-rate mortgage loan provided for homes priced at 600 million won or less and for annual incomes of 70 million won or less (85 million won for newlyweds). The maximum term is up to 40 years, and the maximum loan limit is about 360 million won.

The Bogeumjari Loan is popular as a means for homeownership among young people in their 20s and 30s. Since it targets genuine buyers, the loan-to-value ratio (LTV) regulation is more lenient compared to other mortgage loans, making it suitable for young people with lower incomes. While bank mortgages apply an LTV of 40% (based on speculative overheated districts), the Bogeumjari Loan offers an LTV of up to 70%. The interest rate is also competitive at 2.9?3.2% per annum, compared to the 3% late to 4% range of commercial bank mortgages.

Demand for the Bogeumjari Loan is expected to increase further in the second half of this year. As interest rates rise, preference for fixed rates is growing, and some commercial banks are refusing to handle mortgage loans altogether.

However, concerns have been raised about the balloon effect spreading even to policy financial products. During the rapid rise in real estate prices in 2016, new Bogeumjari Loan issuance was temporarily suspended, and there is growing anxiety in real estate communities that a similar situation may recur if funding demand concentrates.

Nonetheless, since financial authorities have repeatedly stated that policy financial products will be relatively free from regulations, the possibility of suspension spreading seems slim. Given that the main users are youth and low-income groups, regulating these products could face criticism for squeezing genuine buyers. A Korea Housing Finance Corporation official said, "We will comprehensively review the allocation of policy mortgage resources and support measures to achieve a balanced goal between supporting low-income and vulnerable groups and managing household debt."