[Financial Microscope] 9.7 Real Estate Measures: How Much Has My Loan Limit Decreased?

Government Announces Additional Lending Regulations in September, Following June Measures
Jeonse Loan Limits Lowered for Single-Home Owners, LTV Cap in Regulated Areas Reduced from 50% to 40%
Further Expansion of Land Transaction Permit Zones Antici

The government has introduced additional lending restrictions this month, following similar measures in June, to stabilize the Seoul real estate market. As a result, the borrowing limits for homebuyers will be further reduced. The core of the government’s lending regulation is to lower loan limits in order to prevent overheating in the real estate market. However, since apartment prices in Seoul remain unstable even after the latest regulations, there is a growing possibility that additional measures will be announced.

Lowering Jeonse Loan Limits to Stabilize the Real Estate Market

On September 7, the Financial Services Commission announced additional measures to manage household debt, reducing the jeonse loan limits for single-home owners in the Seoul metropolitan area and other regulated zones. Previously, the jeonse loan limits for single-home owners varied among the three major guarantee institutions-SGI Seoul Guarantee, Korea Housing Finance Corporation (HF), and Korea Housing & Urban Guarantee Corporation (HUG)-at 300 million won, 220 million won, and 200 million won, respectively. These limits have now been uniformly lowered to 200 million won.

With this measure, single-home owners in the metropolitan area who use jeonse loans in the 200 million won range are expected to see their loan limits reduced by an average of about 65 million won. According to the Financial Services Commission, there are approximately 52,000 single-home owners in the metropolitan area who have taken out jeonse loans from the three guarantee institutions, and about 30% of them-around 17,000 people-have loans between 200 million and 300 million won. As their loan limits decrease, they will need to revise their funding plans if they wish to extend their loan terms. However, if the jeonse loan was taken out before the implementation of this regulation, borrowers can extend their loans at the existing limit when renewing their lease contracts.

A Financial Services Commission official stated, "The main purpose of this measure is to standardize the jeonse loan limits, which currently differ by guarantee institution, to 200 million won." The official added, "Although this may cause inconvenience for those affected, these borrowers already own homes, and the debt service ratio (DSR) does not apply to jeonse loans, which was taken into consideration."

View of apartment complexes in downtown Seoul from Namsan, Seoul. Photo by Dongju Yoon

LTV Cap Lowered from 50% to 40%, Additional Regulations Suggested

When announcing the latest measures, the Financial Services Commission also tightened the loan-to-value (LTV) ratio cap for mortgage loans in regulated areas (Gangnam 3 districts and Yongsan District), lowering it from 50% to 40%. The commission explained that this aims to curb loan demand in areas where both housing prices and loan amounts are relatively high, while also strengthening the financial soundness of households and financial institutions.

However, there has been criticism that strengthening the LTV to 40% in regulated areas will not be very effective, since the June 27 real estate measures already introduced a 600 million won mortgage loan cap. Many point out that in the case of high-priced apartments in Gangnam 3 districts and Yongsan District, the 600 million won loan cap is already in effect, so lowering the LTV to 40% will have limited impact. Therefore, some analysts believe that the latest regulation is aimed at areas other than the Gangnam 3 districts, where housing prices have already risen significantly.

In response, a Financial Services Commission official stated, "Not all housing prices in regulated areas exceed 1.5 billion won," and added, "If additional areas are designated as regulated zones in the future, the strengthened LTV will also apply," indicating the possibility of further regulations.

The market expects the government to designate areas such as Mapo District and Seongdong District in Seoul, as well as certain regions in Gyeonggi Province where apartment prices have recently surged, including Gwacheon and Bundang, as land transaction permit zones. This expectation stems from the government’s announcement that the authority to designate land transaction permit zones will be expanded from provincial governors to the Minister of Land, Infrastructure and Transport.

In these areas, many apartments are priced between 1 billion and 2 billion won, making them directly subject to the 40% LTV regulation. For example, to purchase an apartment worth 1 billion won, the maximum mortgage loan allowed was previously 600 million won, but with the LTV reduced to 40%, the loan will now be capped at 400 million won.

President Lee Jaemyung also indicated the possibility of further lending restrictions. In a press conference marking his 100th day in office on September 11, President Lee stated, "It is unlikely that the real estate issue can be resolved with one or two measures," and added, "We will continue to introduce policies to stabilize real estate prices."

Despite the series of regulations, the upward trend in Seoul apartment prices has not subsided, increasing the likelihood of additional restrictions. According to the Korea Real Estate Board, as of the second week of September, the weekly increase in Seoul apartment sale prices was 0.09%, up from 0.08% the previous week. Apartment prices in key areas such as Gangnam, Seocho, and Yongsan are all on the rise.

In addition to expanding the land transaction permit system, applying the debt service ratio (DSR) to jeonse loans is another regulatory option the government holds. A Financial Services Commission official stated, "The government has consistently maintained its position to expand the application of the DSR to jeonse loans and similar products," and explained, "We will determine the timing and method of implementation based on the growth rate of household debt and the conditions of the real estate market."