[1mm Financial Talk] Pension Loans Only for Public Officials... Popularity Explodes with 'Low Interest Rates in the 2% Range'

Starting from the 6th of next month, Q2 Civil Servant Pension Loans Implemented
Interest Rate at 3.91% Annually, but Benefits Can Lower It to 2% Range
DSR Regulations Strengthen but Loan Restrictions Not Applied
Due to Explosive Popularity, Early Sell-Out Possible in Q2 as Well

The second quarter application period for pension loans, which civil servants use to secure housing funds and other purposes, is about to begin. Although interest rates have reached their highest level in seven years, low-interest loans in the 2% range, which are hard to find in the private sector, are available, so early sell-out is expected to continue.

According to the Government Employees Pension Service on the 31st, the interest rate for this year's second quarter government employee pension loans, starting from the 6th of next month, has been set at an annual rate of 3.91%. This is about 1 percentage point higher than the 2.99% rate at the end of last year. Compared to the first quarter (3.46%), it has also risen by 0.45 percentage points. This is the highest level in about seven years since the fourth quarter of 2014 when the loan interest rate was 3.93%.

The government employee pension loan is a system that allows borrowing money at the current time by using pension assets to be received after retirement as collateral. There are general loans, housing fund loans (type 2), and social policy loans (11 types). The limits are 20 million KRW, 70 million KRW, and 30 million KRW respectively. The interest rate is adjusted quarterly based on the newly announced household loan interest rate by the Bank of Korea and the 5-year government bond yield.

Although the interest rate is approaching the 4% range, the prevailing view is that the allocated fund of 200 billion KRW will be exhausted early before the deadline again this time. When the first quarter loan was implemented earlier this year, all the funds were sold out within 10 minutes of the start. At the same time, 13,000 people rushed in, causing the server to crash and temporarily suspend sales.

"Still cheap despite the increase"... Early sell-out expected again in the second quarter

Although the interest rate is in the 3% range, it is significantly cheaper compared to private commercial banks. Major banks such as KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup have introduced mortgage loan products with interest rates in the 6% range for the first time in over 10 years. Some believe that entering the 7% range is only a matter of time. Even credit loan interest rates have risen to the mid-4% range for high-credit borrowers with grade 1 credit scores.

It is still advantageous that loans are available at interest rates in the 2% range. The Government Employees Pension Service grants a preferential interest rate discount of 1 percentage point through social policy loans if certain conditions are met. This means that loans with an interest rate of 2.91% are possible in the second quarter as well. The eligibility criteria are broad, including having preschool children, being newlyweds, or having children who are getting married.

In particular, government employee pension loans are exempt from the strong loan regulations currently implemented by the government. Currently, if the total loan amount exceeds 200 million KRW, the Debt Service Ratio (DSR) regulation of 40% applies. This means that no more than 40% of annual income can be used for principal and interest repayment. From July, the total loan amount threshold will be lowered to 100 million KRW. Government employee pension loans are not subject to these restrictions. As a result, last year, when the Ministry of Economy and Finance announced the application of LTV regulations to in-house housing fund loans of public institutions, there was controversy over fairness with government employee pension loans.

Various loan conditions have also been relaxed. For the general public, borrowing money using retirement pensions as collateral involves strict conditions, and actual loans are rarely granted. On the other hand, government employee pension loans allow housing fund loans as long as the borrower and their spouse have been without a home for more than two years. A credit score of just over 514 is sufficient, and although the loan limit may be reduced, the interest rate remains the same.