Targeting speculators who use tenants' deposits to buy homes

Exceptions allowed when move-in is blocked by existing tenants

Banks to face higher capital burden as guarantee coverage shrinks

Salary spikes from bonuses to be smoothed in debt service ratio calculations

An apartment complex in Seocho-gu, Seoul. [Herald DB]
An apartment complex in Seocho-gu, Seoul. [Herald DB]

Starting Jan. 1 next year, single homeowners in the Greater Seoul area and regulated zones who have never lived in their apartment will be barred from taking out new jeonse loans or renewing existing ones. The measure represents a significant tightening of speculative-demand restrictions that currently apply only to multi-homeowners and buyers in designated overheated districts.

The Financial Services Commission announced the measures Thursday as part of a comprehensive financial package aimed at stabilizing the real estate market. The steps follow repeated remarks by President Lee Jae Myung that excessive jeonse lending has been a key driver of rising home prices. Authorities identified a common speculative pattern in which buyers purchase apartments in the Greater Seoul area or regulated zones without any intention of living there, then use tenants' lease deposits to finance the purchase.

Under the new policy, non-resident single homeowners holding apartments in the Greater Seoul area or regulated zones will be added to the list of borrowers barred from jeonse loan guarantees starting next year. Currently, restrictions on new jeonse loans and renewals apply in principle to multi-homeowners and those holding apartments worth more than 300 million won ($212,000) in speculative or overheated districts. The new rules extend those restrictions to non-resident single homeowners. Because jeonse loans from banks are backed by guarantees from the Korea Housing Finance Corp., the Korea Housing and Urban Guarantee Corporation and SGI Seoul Guarantee, a suspension of guarantee coverage would in effect reduce the loan ceiling to zero.

As a result, non-resident single homeowners who currently hold jeonse loans are expected to face a wave of forced repayments when their loans come due. A banking industry official said that because jeonse loans are collateralized by guarantee certificates, a restriction on guarantees effectively shuts off lending. The official added that borrowers who have been rolling over two-year jeonse loans in line with lease renewals will find extensions impossible starting next year, meaning the impact of restricting renewals on existing loans will likely be greater than that of blocking new ones.

Financial authorities had signaled tighter lending rules for non-resident single homeowners in April, when they announced plans to restrict mortgage renewal for multi-homeowners, but had been deliberating over how to identify speculative demand within that group. Authorities ultimately defined a speculative non-resident single homeowner as someone who meets all three criteria: holding an apartment in the Greater Seoul area or a regulated zone on a combined-spousal basis, renting the property to a third party (excluding family leases), and having no history of actual residence in the property by either the owner or their spouse.

▶ Exceptions for genuine owner-occupiers — The government will, however, grant exemptions to genuine owner-occupiers who cannot move in due to unavoidable circumstances. Buyers who purchase a home with an existing tenant and cannot move in immediately will be allowed only to extend their current jeonse loan until the existing lease expires. By contrast, buyers who are legally required to occupy the property after the lease ends — such as those purchasing in land transaction permit zones — may take out new jeonse loans, though they must terminate those loans once they actually move in.

Extensions will also be permitted when a landlord has failed to return the jeonse deposit, making repayment difficult. Short-term extensions of up to six months will be allowed in cases where a tenant is set to vacate after a lease expires but needs a temporary extension because moving or move-in schedules do not align. Beyond these defined cases, a bank's credit review committee may approve new jeonse loans or renewals when it determines that non-residency is unavoidable, allowing for circumstances too varied to be captured by uniform criteria.

▶ Jeonse loan guarantee ratio for single homeowners cut by 10 percentage points — Financial authorities also said they will maintain a strict overall lending posture. Starting next year, the jeonse loan guarantee ratio for single homeowners in the Greater Seoul area and regulated zones will fall from 80 percent to 70 percent, while the ratio for other regions will drop from 90 percent to 80 percent. Authorities had already reduced the guarantee ratio for the Greater Seoul area and regulated zones from 90 percent to 80 percent through the June 27 package last year. For those without a home, the current ratios — 80 percent in the Greater Seoul area and regulated zones, and 90 percent elsewhere — will remain unchanged.

The reduction means that when a jeonse borrower defaults, guarantee agencies such as the Korea Housing Finance Corp., the Korea Housing and Urban Guarantee Corporation and SGI Seoul Guarantee will cover only 70 percent of the outstanding loan to the lender, down from 80 percent. With financial institutions now bearing a larger share of the risk directly, jeonse loan screening is expected to tighten and the loan amounts available to borrowers are expected to shrink. Authorities said they are gradually lowering guarantee ratios because high coverage has been exploited for gap investment, fueling home price increases.

▶ Blocking loan inflation from bonus income — Income verification for loan applications will also become more rigorous. Starting next year, employment income will be subject to income-fluctuation analysis when calculating the debt service ratio, preventing borrowers whose income temporarily surges in a given year due to bonuses or other one-off payments from receiving an outsized loan ceiling. Currently, employment income is assessed using the most recent one year of earnings regardless of how sharply income has risen or fallen. Non-employment income, by contrast, is already assessed using the most recent one year as a baseline, with a two-year average applied when income fluctuates by more than 20 percent over the past two years.

Going forward, the same standard will apply to all income, including employment income. The most recent one year of income will be used as the default, but if income has risen by more than 20 percent, the two-year average will apply, and if it has risen by more than 30 percent, the three-year average will be used. When income has declined, the most recent one year of income will be annualized for assessment purposes to prevent loan ceilings from being cut too sharply.

▶ Higher capital requirements for banks expanding mortgage exposure — Banks that extend mortgages on high-value properties or with high loan-to-value ratios will also face greater capital burdens starting next year. Banks are required to set aside a portion of each loan as a capital reserve against the possibility of non-repayment, and authorities plan to raise that required ratio. From the banks' perspective, the same volume of lending will require more capital to be held in reserve, reducing their overall lending capacity.

Currently, financial authorities classify two types of mortgages as high-risk — bullet-repayment and interest-only mortgages, and mortgages where the principal repayment ratio falls below 10 percent upon maturity or grace-period extension — and apply above-average risk weights to them. Going forward, two additional categories will be added: high-value property and high loan-to-value ratio mortgages, and large, high debt service ratio mortgages, expanding the high-risk mortgage classification to four types. Risk weights of two to four times the average are being considered for these loans.

In addition, authorities plan to introduce a household-sector systemic risk buffer capital requirement that would oblige banks to set aside additional capital based on their mortgage exposure when household debt exceeds a set threshold relative to GDP. Financial authorities plan to run a six-month pilot before making the requirement mandatory in the second half of next year.

Authorities will also step up monitoring of business loans diverted for purposes such as home purchases. A review of loans extended between July last year and June this year uncovered 178 violations totaling 68.6 billion won in misused funds, prompting loan recalls and restrictions on new lending. By the end of this year, authorities plan to conduct a full review of high-risk business loans extended since 2021 and use the findings to pursue further regulatory improvements.


forest@heraldcorp.com