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Jeonse borrowers may get a break

Published: 28 May. 2013, 20:58

As early as July, banks will likely lower interest rates on long-term deposits known as jeonse while raising limits on the amount than can be borrowed.

Currently, the annual interest on jeonse loans is between 5 and 6 percent. The financial industry projects that once the revised legislation passes the National Assembly, it could go down to 3 to 4 percent.

The move was a follow-up to Park Geun-hye administration measures to boost the real estate market on April 1.

The revised legislation will allow homes and commercial stores to be put up as collateral when applying for jeonse loans.

Under the current law, jeonse loans are issued without collateral. As a result, those seeking jeonse loans have to get a guarantee certificate from the state-run Korea Housing Finance Corporation or Seoul Guarantee Insurance, whose majority shareholder with a 94 percent stake is the state-run Korea Deposit Insurance Corporation.

However, loan guarantee certificates aren’t free. Certificate holders pay 0.1 to 0.6 percent a year on top of the loan interest.

Furthermore, not everyone is eligible for guarantee certificates. Applicants with a low credit rating can be rejected.

The revised legislation solves this problem, as banks will be allowed to sell loan products that allow jeonse deposits as collateral.

If the apartment or the commercial store goes to court for auction, the lender would be the first in line to retrieve the amount they lent on jeonse.

A bank could also issue asset-backed securities by collecting the collateral rights on jeonse loan guarantees.

The Financial Supervisory Service plans to iron out details on conditions for creating new jeonse loan products.

“If banks are allowed to keep jeonse deposit as collateral, there will be more room to lower the interest rates on jeonse loans as the possibility of those loans defaulting is less likely,” said Yook Chang-hwa, who heads KB Kookmin Bank’s loan product development department.

“If there is collateral, there’s no need for a loan guarantee certificate, which will reduce the burden on borrowers.”

According to the Korea Housing Finance Corporation, 10.9 trillion won ($9.7 billion) in jeonse loan guarantee certificates were collected last year. This is a sharp increase considering that the state-run institution collected 4.7 trillion won in 2009, when jeonse prices in the greater Seoul area started to pick up momentum. For the first four months of this year, the state-run institution earned roughly 4 trillion won.

The government estimates that if 10 trillion won or so in jeonse loans are converted to the new collateral system and the interest rates on average fall 1.5 percentage points, the tenants’ total interest burden will likely be 150 billion won lighter.

Additionally, loan seekers could ask for more loans at banks. Currently the Housing Finance Corporation guarantees a maximum of 80 percent of jeonse loans up to 150 million won. Seoul Guarantee Insurance guarantees a maximum of 200 million won.

The guarantee on the loan could further drop if the person looking to take out a jeonse loan has a low credit rating or other bank loans.

But under the new collateral system for jeonse deposits, there will be no limit. “If the value of the collateral is enough, the person seeking the loan can borrow more than 200 million won,” said Yook at KB Kookmin.

However, a condition of the new loan program is that the tenant first report to the local government.

The revised jeonse loan legislation is expected to be passed on to the National Assembly as early as Monday.

Meanwhile JoinsLand, an affiliate of the JoongAng Ilbo media network that specializes in real estate information, has found that jeonse prices in the past five years have surged 42 percent. Although the growth rate has slightly decelerated compared to last year, it is still moving upward.

Jeonse prices have been going up in Seoul and neighboring areas since 2009. The provincial areas have seen rising jeonse prices since 2005.

The situation is expected to only get worse in the second half of the year because of a shortage of apartments.

The JoinsLand study showed that apartment prices as of Monday rose 0.72 percent on average in the greater Seoul area since the beginning of the year.

Jeonse on an 84-square-meter apartment in Nowon District was 330 million won at the beginning of the year. However, this week, the jeonse price on the same apartment was 380 million won.

The jeonse on an 84-square-meter apartment in Pangyo, Gyeonggi, has risen 50 million won since the beginning of the year to 420 million won.

During the same period, jeonse prices rose 1.75 percent in other regions.

Areas away from Seoul have been suffering from sharply rising jeonse prices since the mid-2000s largely due to shortage of supply.

“Jeonse prices can only stabilize when potential home buyers start buying apartments,” said Lee Nam-soo, who heads the real estate department at Shinhan Bank.

Construction Economy Research Institute of Korea in a report released on Sunday claimed that more landlords are switching from jeonse to monthly rent as the interest rates on savings and deposits have fallen.

The Bank of Korea earlier this month lowered the benchmark rate from 2.75 percent to 2.5 percent.

“Jeonse prices will likely shoot up as there will be a shortage of available apartments while tenants will likely avoid jeonse apartments where the landlord has huge debts and may not have the ability to refund their jeonse once the contract is over,” said Huh Yoon-kyung of the construction economic research institute.

By Joo Jung-wan, Hwang Jeong-il [[email protected]]