Your questions answered: What the Aug. 13 real estate package means for borrowers

A FAQ on the Aug. 13 real estate measures and their lending implications:

① How will the 30 trillion won in additional lending capacity be used?

② What are the standards for balance-payment loans on new apartments?

③ Will mortgage loan limits be restored from 300 million won to 600 million won?

④ Will borrowers with lower credit scores find it easier to get loans?

⑤ Why is youth housing support focused on villas and officetels?

The government's Aug. 13 real estate package has unlocked roughly 30 trillion won ($21.7 billion) in additional lending capacity across the financial sector, finally cracking open bank loan windows that had been firmly shut. Prospective apartment residents who had been unable to secure balance-payment loans, as well as self-employed individuals facing cash shortfalls, can now breathe a little easier.

Yet many questions remain. Borrowers want to know how balance-payment loan standards will work, whether bank lending limits that were slashed in half will be restored, whether people with lower credit scores can borrow without worry, and what benefits are available to young borrowers. Here is a rundown of what readers most want to know.

Q. How will the additional 30 trillion won in lending capacity be used?

A. Under the Aug. 13 package, financial authorities raised the target growth rate for total household lending this year from 1.5 percent to 3.0 percent — a level calibrated to address genuine demand such as balance-payment loans without stoking speculative sentiment in the property market. A projected rise in nominal GDP on the back of a semiconductor boom also factored into the decision to lift the target.

The move adds roughly 30 trillion won to the lending capacity available across the financial sector. That amount is divided into three broad categories: loans extended directly by financial institutions, policy loans, and a reserve pool.

Financial authorities are understood to have allocated the largest share to the reserve pool. The plan is to deduct balance-payment loans from this separately managed reserve rather than from each bank's own lending quota. Under this arrangement, banks can extend balance-payment loans more freely without being constrained by their individual quotas.

The rationale is that demand for balance-payment loans is large — so much so that the real estate package can fairly be described as having been designed primarily for prospective residents who could not secure such financing. The real estate industry estimates that balance-payment loan demand will reach about 26 trillion won through the end of the year.

Of the 30 trillion won, the portion not earmarked for balance-payment loans is intended mainly for low-income and vulnerable households and young borrowers. Although banks will receive some additional quota for their own lending, the policy goal is to ease financing difficulties for genuine end-users, which means banks are unlikely to extend mortgage or personal credit loans more aggressively than they did before the Aug. 13 announcement.

Q. What standards will banks apply to balance-payment loans?

An exterior view of the Dieh Bangbae complex in Bangbae-dong, Seocho-gu, Seoul. [Hyundai E&C]

A. Banks have broadly settled on using the pre-sale price as the basis for balance-payment loans in the second half of this year.

For the Dieh Bangbae complex in Seocho-gu — currently the site of the heaviest balance-payment loan demand — the five major banks plan to apply whichever is lower: 60 percent of the pre-sale price or 50 percent of the appraised value. Because appraised values have risen sharply above pre-sale prices amid recent home price increases across the greater Seoul area, applying this standard effectively means calculating loan limits based on the pre-sale price.

With banks settling on the pre-sale price standard, a significant number of prospective residents are likely to find their loan limits fall short of what they need. The current market price for a standard unit with an exclusive use area of 84 square meters at Dieh Bangbae stands at around 4 billion won. Using the appraised value would yield a loan limit of about 2 billion won. Based on the pre-sale price of 2.2 billion won, however, the limit comes to 1.32 billion won — a gap of roughly 700 million won. In practice, borrower-specific regulations such as the debt service ratio will apply on top of these limits.

The decision to use the pre-sale price, despite the backlash it is drawing from prospective residents, comes down to the overall household lending quota. With a fixed ceiling in place, banks say using the pre-sale price is the only way to distribute balance-payment loans as broadly as possible. Although balance-payment loans are deducted from the reserve pool rather than each bank's own quota, the reserve itself is carved out of the 30 trillion won envelope and cannot be drawn on without limit. With about 70,000 households scheduled to move in during the second half of this year, banks warn that switching to an appraised-value standard could leave many borrowers without financing.

Financial authorities plan to review the status of balance-payment and other group loans as early as September to check whether any projects have received an excessive volume of lending. Banks interpret this as a signal to keep lending as conservative as possible, and plan to hold back on rate-cutting and other competitive marketing. Secondary financial institutions — including savings banks and mutual finance companies — will apply the same standards as commercial banks for balance-payment loans.

Q. Will bank mortgage limits be loosened again going forward?

A. The tightened management stance is expected to remain in place through the end of the year, as the additional lending quota distributed to banks is not large.

Financial authorities distributed additional lending quotas to individual financial institutions by last week, covering the portion of the 30 trillion won increase that banks can use for their own loans after setting aside balance-payment and policy loans.

The five major banks have recorded a combined increase in household lending of 4.34 trillion won so far this year. Because authorities doubled the household lending growth target from 1.5 percent to 3.0 percent, the industry had expected the new quota for the five banks to also roughly double, to about 8.6 trillion won. The actual quota distributed, however, fell short of that figure.

Authorities had little room to allocate a generous quota for banks' own lending, given that the primary driver of the real estate package was the large volume of balance-payment loan demand.

Three of the five major banks had already exceeded their household lending quota before the real estate package was announced. Even with additional quota in hand, there is broad consensus within the banking industry that conservative disbursement is the only way to keep loan windows open through year-end, given that demand remains strong.

As a result, voluntary restrictions — such as cutting mortgage loan limits from 600 million won to 300 million won or restricting mortgage insurance enrollment — are unlikely to be lifted anytime soon. The same applies to caps limiting personal credit loans and revolving credit lines to 100 million won or less. Some banks, including Nonghyup Bank, have eased their restrictions, but such moves are unlikely to spread across the industry.

A loan counter at a bank in Seoul. [Yonhap]

So-called rate marketing — expanding preferential rate items or lowering interest rates — is also unlikely to be seen for the time being. Authorities instructed banks to refrain from excessive competition even as they distributed additional lending quotas. With the Bank of Korea raising its benchmark interest rate and market rates climbing in tandem, the interest burden on borrowers is set to increase further.

Financial authorities say maintaining this somewhat contradictory stance — easing the difficulties faced by genuine end-users while avoiding sending the wrong signals to the property market — is unavoidable given the current circumstances.

Q. Will borrowers with lower credit scores be able to borrow more freely?

A. Banks plan to keep general mortgage and personal credit loans at existing levels while significantly lowering the bar for mid-rate loans. Borrowers in the bottom 50 percent of credit scores are expected to find it easier to obtain loans than before.

Financial authorities decided to raise the exemption rate for mid-rate loans from the household lending quota from 30 percent to 70 percent. Under the old rules, if a bank extended 10 million won in mid-rate loans, 7 million won counted toward its household lending quota. Going forward, only 3 million won will count. This gives banks a stronger incentive to extend mid-rate loans more actively.

Credit card companies, savings banks and mutual finance companies are expected to step up mid-rate loan marketing, including rate cuts. Financial authorities decided to exclude mid-rate loans extended by these institutions from the household lending quota entirely.

Q. What benefits are available to young borrowers?

A. Financial authorities have indicated that some loans targeting young borrowers will be excluded from the household lending quota, meaning young borrowers should find it easier to obtain financing than before.

In particular, the government expanded eligibility for the special jeonse loan guarantee for young people, raising the age ceiling from 34 to 39 for homeless young adults. For newlyweds and couples with children, the loan limit was also raised from 200 million won to 300 million won.

Loans extended through this product will be partially exempt from the household lending quota, which is expected to prompt financial institutions to supply and market the product more actively.

Loan limits for young borrowers could increase further down the line.

Since July 2021, financial authorities have allowed the debt service ratio for homeless young workers taking out a mortgage to purchase a home to be calculated using projected future income. The projection uses average income growth rates from Ministry of Employment and Labor statistics, applied in five-year increments starting from age 20.

The debt service ratio is calculated by dividing annual principal and interest payments by annual income. A higher projected income lowers the ratio, which in turn allows for a larger loan. That is why factoring in future income can expand a borrower's loan limit.

Until now, banks were not required to proactively inform borrowers of the option to use projected future income, meaning some young people took out loans without knowing the option existed. Starting in September, however, banks must notify borrowers whether they are eligible to have future income factored into their debt service ratio calculation.

To illustrate how much the loan limit can change when future income is factored in, a simulation was requested from a commercial bank.

Take a 35-year-old with a current annual salary of 65 million won applying for a fixed-rate mortgage at an annual rate of 5.5 percent, with a 30-year term and equal principal-and-interest repayments. The calculated loan limit comes to 335 million won.

Applying Ministry of Employment and Labor statistics, the borrower's projected future annual salary works out to 69.25 million won. Using that figure to calculate the debt service ratio raises the loan limit by about 20 million won, to 357 million won.

Q. What is the Youth Future Home Loan?

A. The Youth Future Home Loan is a policy loan product the government is launching through the Korea Housing Finance Corp. to ease the housing difficulties faced by young people. Its core feature is an 80 percent loan-to-value ratio for the purchase of non-apartment housing — such as villas or officetels — priced at 400 million won or less.

The product targets borrowers aged 39 or under with an annual income of 70 million won or less.

Financial authorities are considering setting the interest rate at around 2 percent per year — low enough that monthly principal and interest payments would be comparable to monthly rent, with the aim of helping young people achieve homeownership.

The product has drawn sharp criticism, however, with many asking why the government is encouraging young people to take on debt to buy villas at a time when housing difficulties are worsening precisely because of a shortage of apartment supply in the greater Seoul area and the resulting price increases. Even officials within the financial authorities who designed the policy have been quietly wrestling with the backlash.

The product originated as one of several ideas proposed by a youth advisory panel operating within the financial authorities and the Korea Housing Finance Corp. The underlying proposal was that helping young people at the start of their careers buy housing suited to their income level would be more efficient than having them spend money indefinitely on monthly rent with nothing to show for it.

Borrowers who use the Youth Future Home Loan will retain their first-time homebuyer loan-to-value benefits and their apartment subscription eligibility. The government says the product is intended as a stepping stone to address young people's housing difficulties — buying a villa through this program does not foreclose the option of purchasing an apartment in the future. The government also plans to accelerate apartment supply in the greater Seoul area by activating project financing.

Q. Can homeowners who live away from their property due to work be denied jeonse loans?

A. Anyone who has lived in their home for even a single day is exempt from the restriction. Even those who have not lived in their home may be exempt if there are extenuating circumstances. For example, an office worker in Seoul who secured a jeonse property in anticipation of a transfer to Busan — only for the transfer not to materialize as expected — would also qualify for an exemption. Banks plan to compile a list of qualifying exceptional cases through the Korea Federation of Banks.

hyuk@heraldcorp.com