'Jeonse Loan Regulations' Reviewed from Multiple Angles... Guarantee Ratio Reduction and Interest Rate Increase Considered

Government to Announce High-Intensity Household Debt Measures This Month
Focus on Enhancing Effectiveness of 'Repayment Ability Assessment'

Apartments in Seoul / Photo by Moon Honam munonam@

[Asia Economy Reporter Kwangho Lee] The government is considering various measures to include regulations on jeonse loans in its high-intensity household debt management plan.

According to financial authorities and the financial sector on the 2nd, the government is reportedly reviewing measures such as interest rate hikes, limit reductions, guarantee ratio cuts, and stricter screening for jeonse loans as part of the high-intensity household debt management plan to be announced shortly after the National Assembly audit.

This is the first time the government is regulating jeonse loans for non-homeowners. While the September 13, 2018 measures banned jeonse loans for multi-homeowners, non-homeowners were not affected. This was to avoid potential public backlash. Although it is a difficult choice to impose jeonse loan regulations ahead of the presidential election, it is seen as an inevitable decision to curb rising housing prices and household debt.

Ko Seung-beom, Chairman of the Financial Services Commission, recently told reporters, "Jeonse loans are for actual demand borrowers, so they need to be examined carefully, but there has been an increase due to favorable conditions," adding, "There are criticisms that the interest rates and conditions are advantageous, so we will comprehensively review those aspects."

The government is expected to induce an increase in jeonse loan interest rates. One method under consideration is reducing the guarantee limit for jeonse loans. Jeonse loans are guaranteed 90-100% by guarantee institutions such as the Korea Housing Finance Corporation, SGI Seoul Guarantee, and the Housing and Urban Guarantee Corporation, which results in lower interest rates.

According to the Korea Federation of Banks, as of the third week of September, the average interest rates for jeonse loans guaranteed by the Korea Housing Finance Corporation at the five major commercial banks ranged from 2.64% to 3.03%. If the guarantee limit is reduced, the risk borne by banks increases, forcing them to raise interest rates. Loan screening will also become stricter, potentially reducing loan limits.

Financial authorities regard KB Kookmin Bank's jeonse loan management measures as a model case. On the 16th of last month, Kookmin Bank reduced preferential interest rates on jeonse loans and suspended refinancing loans. Loan limits were also restricted to within the range of the jeonse price increase.

Other measures under discussion include requiring a funding plan when applying for jeonse loans or requiring borrowers to repay existing overdraft loans when executing jeonse loans.

A financial authority official said, "We are considering various measures to curb the increase in jeonse loans while minimizing the impact on actual demand borrowers."

Oh Jung-geun, President of the Korea Financial ICT Convergence Society, pointed out, "Uniform loan regulations push those who need living expenses out of the formal financial sector. Simply restricting the total volume without addressing the causes such as rising real estate prices and a weak economy has significant side effects."

Professor Sung Tae-yoon of Yonsei University's Department of Economics advised, "If bank loans are blocked for actual demand borrowers, they may turn to secondary financial institutions or private loans, so loans should not be blocked. Low-credit borrowers should receive financial support through policy funds."