With consumer concerns growing over so-called "purchase reservation deposits" in the private rental housing market, the Financial Supervisory Service issued a consumer alert.
At some private rental housing business sites, there have been cases where, when signing lease contracts with tenants, they are encouraged to pay what is colloquially called a "purchase reservation deposit" on the condition of conversion to sale after the mandatory rental period ends. This method is called the "purchase reservation system," and critics say it not only fails to align with the intent of the system but could also lead to financial harm for tenants.
A purchase reservation deposit is money based on a private contract and does not legally correspond to a lease deposit. Accordingly, priority repayment rights under the Housing Lease Protection Act are not recognized, and recovery may be difficult if incidents such as the landlord's bankruptcy occur. It is also not covered by the lease deposit return guarantee of the Korea Housing & Urban Guarantee Corporation (HUG), making legal protection difficult.
The Ministry of Land, Infrastructure and Transport also recognized this issue and, on Feb. 2023, sent an official notice to local governments requesting guidance to landlords and tenants so that purchase reservation cases related to private rental housing would not occur.
In particular, unverified information is spreading on blogs and social media (SNS) claiming that purchase reservation deposits can be paid through financial companies' jeonse loans, requiring caution. The financial authorities stressed that people should not mistake the amount as being afforded the same protection as a lease deposit.
Borrowing that relies on excessive leverage also warrants caution. Some are promoting that loans of up to 90% of the lease deposit and purchase reservation deposit are possible, but this may constitute an unsuitable solicitation that could increase the borrower's repayment burden. Experts advise carefully checking whether the principal and interest due each month are manageable in light of one's income level.
Liquidity risks that may arise at the time of conversion to sale are also cited as a problem. Even if a purchase reservation deposit is paid using jeonse loans, it must be refinanced with a mortgage loan during the ownership transfer process, and additional funds may be required under the debt service ratio (DSR) and loan-to-value (LTV) regulations. If the necessary amount cannot be secured, there is a possibility of exposure to credit risks such as arrears.
The financial authorities said, "Do not be swayed by promotional phrases claiming that because large loans are available, you can sign a purchase reservation contract even if you currently lack funds," and urged, "Before signing, thoroughly check the system and risk factors."