photo = news 1
There is an unusual phenomenon in which the interest rate on the Jeonse loan exceeds the ‘Jeonse-to-monthly rent conversion rate’. Jeonse/monthly rent conversion rate refers to the ratio of monthly rent that replaces the Jeonse deposit. If the interest rate on the cheonsei loan is higher than the conversion rate to cheonsei, it becomes more advantageous for the tenant to pay the monthly rent to the landlord rather than to take out a cheonsei loan and pay interest to the bank. However, in the mid- to long-term, it is predicted that the burden on tenants will increase significantly as the monthly rent is linked to the interest rate on the jeonse loan.
Jeonse loan interest is higher than monthly rent
According to Kookmin Bank’s new COFIX (Funding Cost Index) on the 19th, the interest rate on the jeonse loan (changed over 6 months) is 3.65 to 4.85% per annum. Jeonse loan interest rates have risen by about 1 percentage point since August last year (2.38 to 3.99 percent per annum). As the Bank of Korea further raises the base rate on the 14th, the interest rate on jeonse loans is highly likely to rise further.
According to Kookmin Bank at the end of last month, the conversion rate for apartments in the metropolitan area was 3.75%. Considering that the interest rate on the jeonse loan has recently risen, the minimum interest rate on the jeonse loan is highly likely to exceed the rate of conversion between cheonsei and monthly rent. Gyeonggi-do has a relatively high rate of conversion from jeonse to monthly rent at 3.94%, but it is on a downward trend.
Jeonse/monthly rental conversion rate refers to the ratio of monthly rent when the deposit is converted to monthly rent. For example, if the conversion rate between jeonse and monthly rent is 3.0%, the landlord can receive up to 12 million won (400 million won × 3.0%) from the tenant when converting 400 million won of jeonse into monthly rent. If this apartment is converted to a reverse tax of ‘deposit of 200 million won + monthly rent’, the monthly rent is 6 million won (200 million won × 3.0%) per year.
For tenants, the benefits and disadvantages of Jeonse and monthly rent differ depending on the interest rate on the Jeonse loan. If the jeonse-to-monthly rent conversion rate is 3.0% and the jeonse loan interest rate is 2.0% per annum, then receiving a jeonse loan worth 400 million won can reduce the burden by 1 percentage point (4 million won per year). If the interest rate on the jeonse loan is 4.0% per annum, the interest burden on the jeonse loan (16 million won) is higher than the monthly rent (12 million won), so it is advantageous to choose monthly rent.
It has been common knowledge that the conversion rate between cheonsei and monthly rent is higher than the interest rate on jeonse loans. This is because the interest rate on jeonse loans has been kept low due to the low interest rate environment. In addition, since the risk of the lessee being delayed is reflected in monthly rent, the burden of monthly rent is generally higher than that of Jeonse.
However, as jeonse prices jumped sharply and landlords’ supply of monthly rent increased, the conversion rate between jeonse and monthly rent in the metropolitan area showed a downward trend from early last year (4.26%) to October (3.78%). However, as the base interest rate recently rose and household loan regulations continued, the interest rate on the cheonsei loan exceeded the rate of conversion between cheonsei and monthly rent.
For the time being, the monthly rent is advantageous
For the time being, the unusual phenomenon in which monthly rent is more advantageous than Jeonse is expected to continue. In particular, it is analyzed that the trend of ‘conversion of jeonse to monthly rent’ will be clear in Gangbuk of Seoul or the outskirts of Gyeonggi, where the conversion rate between jeonse and monthly rent is relatively low. Seo Young-soo, director of Kiwoom Securities, said, “This year, the interest rate on jeonse loans will rise further as banks will be subject to the household loan total amount regulation.” A bank official explained, “While the monthly rent is fixed for two years according to the contract with the landlord, the interest rate on the jeonse loan is likely to rise steadily for six months, so it may be advantageous for tenants to fix their monthly expenses with monthly rent.”
However, there is a possibility of a supply-demand imbalance in which tenants who have not received a jeonse loan will inevitably switch to monthly rent as loan regulations become stronger. If the demand for monthly rent increases, landlords will have an incentive to increase the monthly rent, which may increase the rent burden on tenants. According to the Korea Real Estate Agency, the average monthly rent for an apartment in Seoul was 1245,000 won as of December last year, up 10.5 percent in a year.
By Park Jin-woo, staff reporter jwp@hankyung.com
ⓒ Hankyung.com, unauthorized reprinting and redistribution prohibited
