Jeonse loan rates break 7 percent for floating-rate borrowings

Finance

Published: 24 Oct. 2022, 16:27

Jeonse loan rates break 7 percent for floating-rate borrowings

A poster promoting loans and the rate offered at a bank in Seocho, southern Seoul, Sunday. [YONHAP]

Rates for jeonse loans now exceed 7 percent, putting households and the economy under stress as the vast majority of these borrowings are floating rate.

In jeonse deals, a tenant pays a single lump sum to a landlord to live in an apartment for a fixed period of time, getting the money back upon vacating the premises. Borrowed funds are often used to cover the deposit, which can be close to the value of the property.

Annual interest on floating-rate jeonse loans from the four largest banks in Korea – KB Kookmin, Shinhan, Hana, Woori – ranged from 4.54 to 7.057 percent as of Saturday, compared to a range of 4.26 and 6.565 percent at the end of September.

Rates on the loans have been climbing as the central bank maintains its policy of steady tightening.

The Bank of Korea raised the base rate by 50 basis points to 3 percent on Oct. 12. It is projected to further up the rate at the next Monetary Policy Board meeting, scheduled for next month, as inflation continues to stay above the central bank’s target range of 2 percent.

Inflation was 5.6 percent in September, slightly lower than 5.7 percent in August, and 6.3 percent a month earlier.

The need to match the Federal Reserve, which has maintained a hawkish stance, is another reason the Bank of Korea could continue raising the base rate.

The cost of funds index, used to calculate floating-rate mortgage rates, rose 0.44 percentage points from a month earlier to 3.40 percent in September. That is a decade high.

Bond yields are rising fast amid liquidity concerns as companies have trouble covering their debts, as in the case of Legoland Korea's developer in Gangwon Province.

As of the end of December, 93.5 percent of the 162 trillion won ($112.52 billion) of jeonse loans outstanding were floating rate.

“Due to the rapid rise of rates for jeonse deposit loans, an increasing number of tenants are preferring to live in rental apartments,” said a real estate agent running an office in Mapo, western Seoul. “Properties easy to sign as jeonse deals before are not even receiving inquiries."

BY AHN HYO-SUNG, JIN MIN-JI [jin.minji@joongang.co.kr]