'No Way Out for Borrowers Who Stretched Finances' Despair Grows... "Should I Catch the Last Train?" Turning to Insurance Company Mortgages [Financial Microscope]

Government Implements Ultra-Strict Loan Regulations to Curb Housing Prices
'Death Sentence' for Those Who Maxed Out Borrowing... Direct Hit to Genuine Homebuyers
Loan Refugees Turn to Insurance Companies with Remaining Capacity

View of residential buildings (apartments, multi-family houses, row houses, officetels) in Gangnam and northern Seoul from the 63 Building in Yeouido, Seoul. Photo by Yonhap News Agency

#Lee Junghoon (37, pseudonym), an office worker at a major corporation, is currently looking into mortgage loans from secondary financial institutions. Lee signed a contract for an apartment in Gangseo-gu, Seoul, on October 12, just before the October 15 measures were implemented. However, he now finds himself a "loan refugee" in the primary financial sector. "The loan consultant recommended a mortgage loan from an insurance company," Lee said. "I'm debating whether I should take out a loan from a secondary financial institution while it's still possible, since it's unclear when those options might also be cut off."

With the government rolling out a series of loan restriction policies, a year-end credit crunch is expected. Major commercial banks have exceeded their household loan targets and are tightening lending, making it as difficult as "threading a needle" to get a mortgage from a primary financial institution. As a result, genuine homebuyers are turning to secondary financial institutions, such as insurance companies, where interest rates are higher but loans are still available. However, even secondary financial institutions are unable to aggressively expand their mortgage lending due to regulatory pressure from financial authorities, so it remains uncertain whether a "balloon effect" will occur.

As loan limits shrink... 'Death sentence' for those who maxed out borrowing

The government's stringent regulations have dealt a direct blow to both those who have maxed out their borrowing and genuine homebuyers. Under the new measures, unless you have a certain level of cash reserves, it has become virtually impossible to realize the dream of owning a home in Seoul. Loan limits have been reduced, and gap investments-buying a home while maintaining a jeonse (long-term lease) tenant-have also been blocked.

Through these measures, the government expanded regulated areas to all 25 districts in Seoul and 12 locations in Gyeonggi Province, and lowered the loan-to-value (LTV) ratio from 70% to 40%. In addition, borrowers with unsecured loans exceeding 100 million won are prohibited from purchasing homes in regulated areas for one year from the date the loan is executed.

Furthermore, in the Seoul metropolitan area and other regulated regions, the mortgage loan limit decreases as home prices rise. For homes priced between 1.5 billion and 2.5 billion won, the limit has been reduced to 400 million won, and for homes over 2.5 billion won, the limit is now 200 million won. The previous limit was 600 million won. In addition, starting this month, jeonse loans for single-home owners, which were previously exempt from loan regulations, are now included in the total debt service ratio (DSR).

The DSR stress rate (additional interest rate) for the Seoul metropolitan area and regulated regions has also been sharply raised from 1.5% to 3.0%. This measure is designed to prevent an increase in borrowing capacity if interest rates are lowered in the future.

As a result, loan limits have been further reduced. For example, the maximum limit for a variable-rate mortgage (30-year term, equal principal and interest payments, 4% interest rate) for a borrower with an annual income of 50 million won is now 43 million won less than before, and for someone with an annual income of 100 million won, the limit is reduced by 86 million won.

Should I catch the last train now... Eyeing mortgages from secondary financial institutions

Given these circumstances, some genuine homebuyers are now turning to mortgage loans from secondary financial institutions, such as insurance companies. While the DSR for banks is 40%, the DSR for secondary financial institutions is 50%, which is 10 percentage points higher.

Typically, secondary financial institutions have higher interest rates than primary banks, resulting in a heavier repayment burden and little difference in actual loan limits. However, as the government has stepped up pressure to tighten lending, commercial banks have raised their interest rates, making the repayment burden similar and giving secondary financial institutions an advantage in terms of loan limits. According to a mortgage simulation (assuming an annual salary of 60 million won, 30-year term, equal principal and interest payments, and a home purchase price under 900 million won) conducted through a loan consultant, it was estimated that a borrower could receive about 70 million won more from an insurance company mortgage than from a bank.

Moreover, as commercial banks have effectively blocked new mortgage loans, insurance company mortgages remain relatively accessible. As a result, there have even been instances of interest rate reversals. In fact, after consulting with both banks and insurance companies, it was found that while one commercial bank offered a mortgage rate of about 4.7%, a life insurance company offered a rate of 4.3%, which was actually lower than that of the primary financial institution.

Regarding this, a representative from an insurance company said, "It is true that we still have more room compared to commercial banks. However, since financial authorities are tightening household loans, it is difficult to aggressively expand our lending business, so we have not yet seen a significant balloon effect."