The government is moving to tighten restrictions on Jeonse loans. When tenants are unable to repay their Jeonse loans, the guarantee institutions will reduce the ratio of repayment and apply differentiated guarantee limits based on the tenant's income and repayment ability.
According to the Ministry of Land, Infrastructure and Transport on the 9th, the ministry plans to set the housing city guarantee corporation (HUG) Jeonse loan guarantee limits reflecting borrower income, existing loans, and other repayment abilities starting in the second half of this year. Tenants can receive a Jeonse loan based on guarantees from one of the following: HUG, Housing Finance Corporation (HF), or Seoul Guarantee Insurance.
Banks offer Jeonse loans without collateral, trusting that the guarantee institution will cover the loan if the tenant cannot repay it. Until now, HUG has provided Jeonse loan guarantees without considering the tenant's income. It guarantees 100% of the loan amount within 80% of the security deposit, up to 400 million won in the metropolitan area and 320 million won in other regions.
For example, a tenant who secures a Jeonse house worth 300 million won can borrow up to 240 million won regardless of income, and if the tenant is unable to repay the 240 million won, HUG will cover the entire amount.
However, the government has decided to lower the Jeonse loan guarantee ratio from the current 100% for HUG and Seoul Guarantee to 90%, which is the level of HF, within the first quarter of this year. There is also a plan to reduce it to below 90% in the metropolitan area. This means that if a tenant borrows 240 million won and cannot repay it, only 216 million won will be guaranteed.
As the guarantee limits are reduced, banks are likely to conduct stricter loan assessments and raise interest rates.
Starting in the second half of the year, HUG will also adjust its Jeonse loan guarantees based on income and existing loans, similar to HF. This means that if income is low or there are many existing loans, the amount eligible for Jeonse loans may decrease.
The total size of Jeonse loan guarantees by the two major guarantee institutions last year was 52.5914 trillion won for HF and 32.9397 trillion won for HUG, making a total of 85.5311 trillion won.
Despite the initial purpose of supporting housing stability for the working class through Jeonse loans, there are criticisms that it has become a means to inflate Jeonse prices and housing prices.
In a recent report, the Korea Research Institute for Human Settlements noted, "The increase in Jeonse loans may lead to an increase in Jeonse demand, which can elevate Jeonse prices, and landlords may find it easier to purchase dwellings for gap investments, thus increasing buying demand as well." It also analyzed that when Jeonse loan guarantees increase by 3.8%, Jeonse prices rise by 8.21% annually.