Competition Rising in Housing Deposit Loan Market

Banks have either lowered interest rates on loans for housing security deposits or extended lending limits at a time when demand for “jeonse” homes have soared nationwide.

Jeonse is a rental system in which a tenant loans a lump sum to a landlord to lease a housing unit for a fixed period of time. The amount must be returned to the tenant after that period.

Shinhan Bank yesterday lowered its interest rate on housing security deposit loans subject to variable interest by 20 basis points. As of Tuesday, the bank’s interest rate on jeonse loans, coupled with its three-month interest rate for a certificate of deposit, is 5.27 percent, its lowest rate for a loan.

Under the financing program, Shinhan has loaned up to 200 million won (160,966 U.S. dollars) to a new tenant renting an apartment in the Seoul metropolitan area through jeonse.

People renting apartments in eligible areas through jeonse but lacking living expenses can borrow up to 100 million won (80,483 dollars).

Industrial Bank of Korea has also launched a financing program under which it provides such loans to tenants while using certificates provided by Seoul Guarantee Insurance as security. The bank’s interest rate on the loans is between six and 7.02 percent.

The bank has also lent up to 200 million won (160,966 dollars) to a new tenant and 100 million won (80,483 dollars) to a renter who has a jeonse apartment but lacks living expenses. Though the loans will mature within two years, the bank could roll over existing loans for tenants whose leasing terms are extended.

To borrow money from a bank, a tenant needs approval from a landlord to transfer obligations after signing a lease contract and paying 10 percent of the jeonse amount.

Banks have also increased the limit for jeonse loans. Under an apartment security deposit loan program, Hana Bank lends up to 300 million won (241,449 dollars) to a tenant, who can borrow up to 70 percent of the required amount for lease.

The bank lends up to 100 million won (80,483 dollars) for living expenses, but could limit the loan amount if the interest accounts for more than 30 percent of a borrower’s income.

Last month, Industrial Bank, Shinhan, Woori Bank, Hana and NongHyup Bank increased the loan amount for a couple married less than five years from twice their annual income to 2.5 times. The higher loan amount was made possible after Korea Housing Finance Corp. adopted support measures for them while extending credit guarantees and reducing guarantee fees by 10 basis points. Credit guarantees for homebuyers were raised 10 million won (8,048 dollars).

Banks are growing more proactive in providing housing security deposit loans since more tenants have applied for such loans due to the rising jeonse market. Mortgage loan operations have gradually contracted due to tougher financial regulations, but banks expect hefty profits from the loans.

For example, the amount of Shinhan’s jeonse loans jumped from 35.9 billion won (28.9 million dollars) in December last year to 96.3 billion won (77.5 million dollars) Aug. 26.

weappon@donga.com