An association member, A, at a reconstruction complex in Nowon District, Seoul, recently heard a bolt-from-the-blue piece of news. With relocation set for Sept., A had planned to switch an existing mortgage loan to a relocation loan and then find a jeonse home, but received notice that the loan limit could be cut more than expected. A said, "I planned on the assumption that a relocation loan would be available up to 60% of the appraised value, but if only 40% applies, I could be short by about 100 million to 200 million won," adding, "I'm in a situation where I have to redo my jeonse plan."
Confusion over relocation loan limits is growing at redevelopment and reconstruction sites in Seoul. Since the Oct. 15 measures last year, buyers who succeeded to association-member status have been told they can receive only 40%, not the 60% of appraised value they had expected. With jeonse prices high, multi-hundred-million-won funding plans are being shaken, fueling discontent among association members.
According to the maintenance industry on the 26th, the Wolgye Dongshin Apartment Reconstruction Maintenance Association in Nowon District, Seoul, is recently consulting with the partner bank on the relocation loan terms for about 60 buyers who succeeded to member status after the Oct. 15 measures. At a recent general meeting, the complex finalized a plan to begin relocation at the end of Sept. and finish within three months.
The confusion arose over whether loan regulations apply. Some buyer-members claim they were told on site at the time of contract that relocation loans were possible up to about 60% of the appraised value. But in recent confirmations with the partner bank, they were informed that buyers after the Oct. 15 measures could be subject to a 40% loan-to-value (LTV) cap in regulated areas, changing the situation.
One member who bought in the complex said, "I planned to refinance my existing mortgage loan into a relocation loan and then use a jeonse loan to move," adding, "if only 40% applies, the refinancing itself becomes difficult, and I'll have to look for a jeonse place farther out or smaller in size."
The association also says it is in a bind. It said it had guided members that 60% could apply based on financial institutions' guidance and on-site explanations at the time, but after changing financial institutions this year, confirmation with the partner bank indicated buyers after the Oct. 15 measures are subject to 40%, changing the situation.
An association official said, "Since base relocation loans are restricted under policy, we are discussing with the builder ways to make up the shortfall through additional relocation loans," adding, "we are also in talks with the partner bank and the Korea Housing & Urban Guarantee Corporation (HUG) so that any future government easing of regulations can be applied immediately."
The problem is the interest burden on additional relocation loans. Additional relocation loans are raised based on the builder's credit, and the current rate is said to be around 6%. Among members, complaints are emerging that "we have to use loans with higher-than-expected rates, and the funding burden has grown."
This confusion grew as the government's explanation at the announcement of the Oct. 15 measures was taken differently on the ground. At the time, the government said it would not apply tiered loan limit regulations by dwelling price to interim-payment and relocation loans. Some sites took this to mean relocation loans might also be exempt from the strengthened LTV rules. However, on Oct. 29 last year, the Financial Services Commission clarified in a press briefing that the strengthened LTV for mortgage loans in regulated areas also applies to interim-payment and relocation loans.
The problem is not confined to particular sites. According to Seoul City, of 43 maintenance project zones scheduled for relocation this year, 39—about 31,000 households—could face disruptions in raising relocation funds due to loan regulations. The maintenance industry says that with LTV at 40% for single-home owners and loan restrictions for multiple-home owners, the funding burden has increased.
Seoul City recently asked the government to expand the relocation-loan LTV to 70% from the current 40%. The logic is that relocation loans are essential moving funds arising in the course of carrying out maintenance projects, not home purchase funds, so different standards should apply from general mortgage loans. Seoul City is also pushing to raise its own relocation loan support limit to 500 million won from the current 300 million won.
However, the financial authorities are cautious about sweeping easing, as they are maintaining a stance of managing household debt. An industry official said, "If relocation loan regulations persist, delays in relocation will lead to delays in demolition and groundbreaking, ultimately affecting the supply of dwellings," adding, "there needs to be institutional refinements that distinguish between speculative demand and end-user association members."