Buy $716,000 home with $129,000? Gov’t new mortgage plan targets youth

Aerial view of an apartment complex in Seoul, Monday. Yonhap

Finding a place to call home is a universal dream. But in Korea, the dream is slipping further out of reach.

As of the first quarter of 2024, purchasing an 84-square-meter apartment in Seoul would take about 31 years of saving an entire salary without spending a single penny, according to a real estate information platform Dabang.

That's why Jeong, a 29-year-old office worker in Seoul, is very uncertain whether she'll be able to buy a home in the future.

"Marriage costs money, having a child costs money and now it feels I'm living just to spend money. At this rate, how will I ever afford a home?" Jeong said, with her student loan and many other bills in mind. "I want to live in a clean, reasonably priced home without the risk of being scammed."

To help young people like Jeong — who have been priced out of the housing market — financial authorities are considering a new scheme: so-called "shared-equity mortgages."

Under this plan, the state-owned Korea Housing-Finance Corporation (KHFC) invests up to 40 percent of a home's purchase price as a co-owner. Instead of taking out a full loan, buyers can finance part of the purchase through the equity and ease the financial burden.

While buyers will be required to pay a usage fee for the equities owned by the KHFC, it is expected to be lower than the market loan rates. Buyers may also gradually buy back the KHFC's share after purchasing the home. If the property is later sold, any capital gains will be split between the homeowner and the KHFC according to their respective shares.

For instance, under the current loan-to-value ratio of 70 percent, buying a home worth 1 billion won ($716,743) — the average price of 59-square-meter apartment in Seoul — requires the buyer to secure 300 million won in cash, even after borrowing a maximum of 700 million won from a bank.

With the introduction of the new scheme, however, KHFC would invest 400 million won as an equity partner. The buyer would then only need 180 million won in cash — 30 percent of the remaining 600 million won — to purchase the home.

The plan comes amid surging household debt in Korea. Korea’s household debt-to-GDP ratio remains the second-highest among 38 major economies, according to data from the Institute of International Finance.

"This is a way for the government to support homebuyers by covering the funding gap through public-sector equity, without adding to their liabilities," Financial Services Commission (FSC) Chairman Kim Byoung-hwan said.

Financial Services Commission Chairman Kim Byoung-hwan speaks during a press meeting at Government Complex Seoul, May 7. Yonhap

Financial authorities plan to pilot the program after the presidential election on June 3. The initiative will initially cover approximately 1,000 homes, with around 400 billion won in funding. Price caps are expected to be imposed, based on regional median home values: 1 billion won in Seoul, 600 million won in Gyeonggi Province and 400 million won in other regions.

The Democratic Party of Korea's presidential candidate, Lee Jae-myung, also called it "better than nothing," raising expectations that the initiative will retain momentum even under a new administration.

"Compared to fully financing a home through loans, this scheme allows buyers to purchase apartments in better neighborhoods while easing the burden of interest payments," said Kim In-man, head of the Kim In-man Real Estate and Economics Institute. "For genuine home-seekers struggling with limited funds, it could feel like much-needed relief in a long drought."

However, the problem arises if housing prices fall. As an equity investor, KHFC would be first in line to absorb losses — effectively transferring its investment risk to general taxpayers. While the policy aims to rein in household debt, critics argue that it may inadvertently drive up real estate prices even further.

Atif Mian, professor of economics at Princeton and author of "House of Debt," also expressed concerns, calling the scheme "another form of policy-backed lending."

"If housing prices fall, the government stands to lose money — which weakens its incentive to bring prices down. This could lead to a host of political complications and make structural reforms even more difficult to implement," Mian said during an interview with local media outlet Hankyoreh. "Who stands to benefit the most? Those who already own homes."

Similar models have been introduced abroad. The U.K.'s "Help to Buy" program allowed buyers to purchase new homes with as little as a 5 percent deposit, with the government investing in a share of the property. However, the program was discontinued in March 2023 amid criticism that it had driven up housing prices.

Korea has also experimented with shared-equity initiatives before. During the Park Geun-hye and Moon Jae-in administrations, similar schemes met with limited success, as many were unwilling to share future profits with the government during periods of rising home prices.

FSC Chairman Kim acknowledged the risks.

"While there are concerns about the plan, there is also clearly a sense of anticipation," he said during a press meeting on May 7. "We will take into full account the possibility that concentrated demand could drive up housing prices as we design the policy."