Due to Raised Guarantee Thresholds, 'Deposit of 100 Million Won and Monthly Rent of 300 Won' Is Not Acceptable

Up to 79.31 million KRW Jeonse with 3 million KRW monthly rent
"Jeonse-to-Wolse conversion rate to be adjusted every 6 months"
Considering differentiated conversion rates by region

The Korea Housing Finance Corporation (KHFC) will raise the threshold for jeonse loan guarantees starting next year by lowering the jeonse-to-monthly rent conversion rate. As a result, so-called ‘high-priced banjeonse’ lease contracts, where the deposit is 100 million won and the monthly rent is 3 million won, are expected to disappear. This is because most banks do not provide jeonse loans without public enterprise guarantees. Additionally, KHFC plans to consider applying different jeonse-to-monthly rent conversion rates by region, given the deepening polarization in the real estate market.

According to a report by Asia Economy on the 23rd, KHFC is expected to lower the jeonse-to-monthly rent conversion rate from the current 6% to 5.8% starting next month. The jeonse-to-monthly rent conversion rate refers to the rate applied when converting a jeonse deposit into monthly rent. The lower this rate, the smaller the guaranteed lease amount by KHFC.

Previously, KHFC provided guarantees for jeonse loans with lease deposits up to 700 million won (500 million won outside the metropolitan area), regardless of monthly rent, but from September 30th, it began applying a 6% jeonse-to-monthly rent conversion rate. This means that a jeonse deposit of 100 million won and a monthly rent of 500,000 won (100 million won × 6% ÷ 12 months) are considered equivalent in value. Consequently, KHFC guarantees were not provided for metropolitan area houses where monthly rent exceeded 3.5 million won (7 billion won × 6% ÷ 12 months).

With the standard change, starting next year, houses with monthly rent exceeding 3.38 million won will not receive KHFC guarantees regardless of the jeonse loan amount. KHFC recalculates the lease deposit by equating a jeonse deposit of 100 million won with a monthly rent of approximately 480,000 won (jeonse-to-monthly rent conversion rate of 5.8%).

The guarantee threshold also rises for banjeonse contracts. For metropolitan area banjeonse contracts with monthly rent of 3 million won, up to 100 million won (7 billion won - (3 million won ÷ 6% × 12 months)) in jeonse loan guarantees was possible until this year, but with the conversion rate dropping to 5.8%, only 79.31 million won in jeonse loan guarantees will be applied. The guaranteed lease amount shrinks by about 20 million won. For monthly rent of 1 million won, the guaranteed lease amount decreases by about 7 million won, from 500 million won to 493.1 million won.

A senior KHFC official stated, “We plan to adjust the jeonse-to-monthly rent conversion rate every six months based on the Korea Real Estate Board’s Household Housing Trend Survey. Next year, new conversion rates will be applied on January 1 and July 1, respectively.”

Furthermore, KHFC plans to consider differentiating the jeonse-to-monthly rent conversion rate by region next year. This is due to the widening polarization between Seoul and other regions in the real estate market, which has also increased the gap in conversion rates. A KHFC official said, “We will review the converted guarantee deposit data by region according to the conversion rate and discuss it after gathering opinions from customers and experts.”

According to the National Statistical Portal (KOSIS) of Statistics Korea, as of the end of the third quarter this year, the nationwide average jeonse-to-monthly rent conversion rate was 5.9%, with the metropolitan area average 3 percentage points lower at 5.6%. The average conversion rate in Seoul was 5%, with the southeastern area of Gangnam district recording the lowest at 4.5%. In contrast, regions outside the metropolitan area showed an average conversion rate of 6.5%, which is 0.6 percentage points higher than the national average. Chungnam had the highest rate at 7.8%, followed by Chungbuk at 7.7%, Gyeongbuk at 7.4%, and Jeonbuk at 7.3%.

If KHFC recalculates the guaranteed lease amount in Seoul using the average Seoul conversion rate of 5%, houses with monthly rent exceeding 2.91 million won may find it difficult to receive guarantees. For banjeonse contracts with monthly rent of 1 million won, only 460 million won in jeonse loan guarantees would be possible.

Professor Lee Yong-man of Hansung University’s Department of Real Estate explained, “The jeonse-to-monthly rent conversion rate reflects a risk premium in the leasing process, so regions more vulnerable to jeonse fraud tend to have higher conversion rates. It is necessary to consider applying conversion rates that account for regional differences.”