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A New Pathway to Buying a Home
Lee Eun Seo  |  ohhenkwo68@korea.ac.kr
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승인 2019.10.30  13:36:20
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Given the steadily rising house prices in South Korea, it has become nearly impossible for the younger generation to buy their own house without a mortgage loan. In fact, affording to own a house for young members of the common class has been a real-life version of getting blood from a stone. The main problem is the high interest rates for loans, which have reached approximately four percent. This is a burden to borrowers since they have to struggle for a long time in order to pay back their loans. To lighten the burden of buying a house, financial services have been looking to overturn this dismal situation with a number of new offers.

 
Considering the harsh reality, on September 16, the Korea Housing Finance Corporation (HF) launched a new loan product for homeowners called the Common-Class Comfort-Conversion Loan , which has an extremely low interest rate of one to two percent. The recipients of the new loan product are selected by evaluating the house prices of the applicants, with those who have lower house prices having the priority. Because anyone who meets the conditions can apply to convert their mortgage to the Common-Class Comfort-Conversion Loan, the new loan has received significant attention.
 
At the beginning of the application period, the Common-Class Comfort-Conversion Loan became a trending topic in web engines, and the HF website crashed due to the overwhelming number of applicants. The original budget for this product is 20 trillion won, but on September 29, the sum of the applications reached 73.9 trillion won, more than three times of the budget. The conversion is planned to start in October and finish by the end of November. It seems that the actual effects of the loan product will gradually appear.
 
   
▲ Leaflet of Common-Class Comfort Conversion, Provided by Korea Housing Finance Corporation (HF)
 
A Whole New Loan Tactic
 
The Common-Class Comfort-Conversion Loan represents a chance for members of the common class to convert their current mortgage to a lower, fixed interest rate between 1.85 percent to 2.2 percent for loans up to 500 million won. This is a considerable surprise since no other loan products had lower interest rates than this newly introduced item. Moreover, there are prime rates for beneficiaries who meet certain conditions and, if the applicants apply for this product online, they can get an additional 0.1 percent discount on the interest rate. The interest rate that is applied varies according to the expiration date of the loan.
 
Although the product seems highly attractive, not everyone can be a recipient because the conditions are complicated. Only those home-owners who had a mortgage loan before July 23 are able to apply for the product, and those who have mortgage loans with a fixed interest rate are excluded. Conditions for income levels also exist, with the total income of a married couple not allowed to exceed 85 million won; however, for newly married couples and families who have more than two children, they can apply if their income is up to 100 million won. In addition, people who own more than one house cannot apply for the loan product. The price of the houses needs to be lower than 900 million won as well.
 
Benefits of Launching a New Loan Product
 
The most attractive aspect of the Common-Class Comfort-Conversion Loan is the low and fixed interest rates compared to other loans. If the conversion succeeds, a one to two percent reduction in the interest rate can be obtained. This represents a significant reduction in the repayment amount depending on the price of the house. In addition, because the interest rate is fixed, it adds stability to the repayment process. This would eventually alleviate the financial burden on loanees.
 
According to Professor Koh Sung Soo (Department of Real Estate Studies, Konkuk University), due to the Common-Class Comfort-Conversion Loan, the principal and interest that a user has to pay back will be greatly reduced. The government is expecting the portion of borrowers with fixed-rate loans will increase 3.2 percent and reach a target percentage this year of 48 percent.
 
However, because the Common-Class Comfort-Conversion Loan is a product with an expiration period of 10 years or more, applicants have to be aware that they should pay back both the principal and interest. Moreover, if the interest rates in certain foreign countries fall, the South Korean interest rate is likely to fall as well. This could possibly lead the variable interest rate to fall more than the fixed interest rate, influencing the actual payment amount. Though there are some risks, it is more stable to transfer to the Common-Class Comfort-Conversion Loan because the two percent fixed interest rate is likely to decrease the size of the repayments.
 
   
▲ Professor Koh Sung Soo

 

Controversy over the Product

After launching Common-Class Comfort-Conversion Loan , several news media outlets published articles claiming that the loan product was an example of reverse discrimination against borrowers who originally used other financial services with fixed interest rates. These borrowers insisted they were also members of the common class who deserved to have access to the new loan product, but the government has prevented them from applying. They even conveyed their concerns to the Blue House by posting a petition on the government’s website, stating that they should also be included as applicants.

In response to the reverse discrimination controversy, on September 17, the administration offered a solution of lowering the interest rates for other financial services to around two percent. Only comparing the minimum interest rate, the other fixed interest loan products will now have only 0.15 percentage points higher interest rates. However, Professor Koh suggested that the government should provide additional financial services to lighten the burden of buying a house. Professor Koh cautioned about the limitations of the new loan product. He commented that, if the interest burden for borrowers reduces, the demand for houses may increase. However, the mortgage rate does not necessarily decrease the house prices. Even more so than interest rates, house prices are closely related to the government’s lending restrictions, its price regulation of apartments, and tax changes. Therefore, the government has to promote other housing policies to stabilize the housing market in the long term. He added that it is more effective for the supply and demand for houses to stabilize housing prices, rather than through direct intervention and restrictions from the government.

The Common-Class Comfort-Conversion Loan has a huge significance considering the harsh reality in South Korea for the younger generation when buying their own house. Therefore, it has attracted a lot of attention with the hopes of reducing the burden on the common class. However, because the effect of the Common-Class Comfort-Conversion Loan is limited to certain beneficiaries, the government needs to introduce new financial services in the near future to reform the housing market.
 
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