KDI "Jeonse Deposit Return Guarantee, Increase Guarantee Fee Rate and Apply Differentiated Rates"

An expert analysis has emerged suggesting that the premium rates for the Jeonse Deposit Return Guarantee system should be increased to prepare for the rising guarantee incidents caused by the worsening real estate market, including reverse Jeonse.

Moon Yunsang, a research fellow at the Korea Development Institute (KDI), made this claim on the 12th in the "Improvement Plan for the Jeonse Deposit Return Guarantee System." He pointed out that the recent rental market has seen an increase in reverse Jeonse due to falling Jeonse prices, which has led to a chain reaction of guarantee incidents such as "empty shell Jeonse" and Jeonse fraud. Therefore, he emphasized the need to adjust the premium rates of the Jeonse Deposit Return Guarantee provided by the Housing and Urban Guarantee Corporation (HUG) to reflect the current reality.

According to the Bank of Korea's economic outlook report, as of April, the number of households at risk of reverse Jeonse reached 1,026,000, and the average difference between the Jeonse price and the deposit in reverse Jeonse cases was estimated at 70 million KRW. Guarantee incidents, which mean the Jeonse deposit is not properly returned, began to increase after February 2018 when the obligation for landlord consent upon guarantee subscription was abolished to protect tenant rights. The rate of increase accelerated sharply after last year, when the housing market was sluggish, with the amount involved in incidents approaching 2 trillion KRW in the first half of this year alone.

The problem is that vulnerable housing groups are increasingly exposed to risk. To respond to the rise in guarantee incidents, the government lowered the subscription requirements for the return guarantee from a Jeonse rate of 100% to 90%, and reduced the recognized market price range from 150% of the publicly announced price to 140%, effectively lowering it to 126% of the publicly announced price. Based on an analysis of the Ministry of Land, Infrastructure and Transport's actual transaction data for Jeonse and monthly rent and the publicly announced prices of multi-family housing, Research Fellow Moon found that the average publicly announced price of houses excluded from subscription due to strengthened requirements was 130 million KRW, with the majority being under 300 million KRW.

Jamsil Jugong Apartment Complex 5. Photo by Heo Younghan younghan@

Accordingly, Moon suggested that among the guarantee products operated by HUG, the Jeonse Deposit Return Guarantee, which tenants subscribe to, should also have its premium rates increased to prepare for incidents, similar to the Rental Deposit Return Guarantee that registered rental business operators are required to subscribe to. According to the survey, the premium rates for the Jeonse Deposit Return Guarantee range from 0.115% to 0.128% for apartments, 0.139% to 0.154% for non-apartments, while for the Rental Deposit Return Guarantee, corporations pay between 0.073% and 1.590%, and individual businesses between 0.099% and 0.438%, exceeding a maximum of 1.5%. Since the guarantee incident rate rose from 1.10% in 2021 to 1.55% last year, the premium rates should be increased to a corresponding level.

However, he added that raising premium rates would increase the burden on vulnerable groups, so policies such as discounts, differentiation, or having landlords bear part of the premium should be implemented concurrently. Moon emphasized, "Unlike the deposit return guarantee, Jeonse loan guarantees increase household debt and can drive up Jeonse prices, so to reduce this, the Jeonse Deposit Return Guarantee should be expanded."

To prevent the indiscriminate use of Jeonse deposits for gap investment, he suggested considering the use of an escrow system, which is used in payment deposit systems. He proposed a system that uses the Loan-to-Value ratio (LTV) applied to mortgage loans, where if the Jeonse rate exceeds the LTV, the deposit up to the LTV would be protected by the return guarantee, and the deposit exceeding that would be protected by escrow. Moon stated, "For the stable operation of Jeonse, it is necessary to rationalize and differentiate the premium rates of the Jeonse Deposit Return Guarantee system and integrate related Jeonse guarantee systems centered on this."