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Rate hike to hit jeonse tenants, young people
A branch of Hana Bank in Seoul / Korea Times file
By Lee Kyung-min
By Lee Kyung-min
Low-income small- and medium-sized enterprises (SMEs) as well as young people are expected to suffer the most from the central bank's Thursday rate hike decision, economist and analysts said, Friday.
Jeonse tenants say their mortgage interest payments will spike in the short term compared to that of homeowners. Unique to Korea, jeonse is a housing rental system whereby tenants pay a refundable lump sum deposit instead of monthly rent. Jeonse tenants often rely on loans to afford the hefty deposits borrowing up to 80 percent of the total deposit amount payable to their landlords.
For example, the interest total is 20 million won ($17,000), on a loan of 400 million won at a 5 percent interest rate. A key rate increase of 25 basis points will translate to nearly 4 trillion won in interest for borrowers.
Korea Economic Research Institute, a local think tank, says if borrowing rates rise by 1 percentage point, the total defaulted household loans is expected to rise up to 5.4 trillion won, with the delinquency rate soaring by 0.62 percentage points.
“A landlord who has bought a home with a mortgage comprising about 40 percent of the home price will eventually be able to own the home, since monthly interest paid means their debt will decrease, however slowly,” a member of an online community who identified himself as a jeonse tenant said.
“The situation is entirely different for jeonse tenants, because interest paid to the bank every month is for loans taken out for jeonse deposits. The refundable amount plays no role in helping borrowers own a home, other than finding them places to stay for two or four years at best.”
The housing market in the autumn will become paralyzed, as demand for jeonse loans will remain strong despite heavier borrowing costs and the lowered cap on the amount of mortgage loans, a policy put in place to curb the rapid increase in household debt. The government seeks to cap the year-on-year increase at 6 percent this year.
“The housing market will experience turmoil in the months to come, brought on by another very probable key rate increase of 25 basis points, compounded by a greater number of people seeking housing at a significantly higher cost or facing eviction,” Myongji University real estate professor Kwon Dae-jung said.
The outstanding balance of household loans surged 9.7 trillion won in the banking sector last month, prompting commercial lenders to deny new mortgage loans until the end of the year.
Statistics Korea data showed 100,000 salaried workers in their 20s and 30s lost jobs in the first quarter, whereas the number of jobs for people over 50 increased by 410,000.