The government will introduce the "jeonwolse safety trust," a program in which a public body manages tenants' jeonse deposits on behalf of landlords and pays landlords monthly like rent with the revenue generated from managing the deposits. The aim is for a public institution to manage jeonse deposits to reduce the risks of unpaid deposits and jeonse fraud, while also lowering tenants' housing costs compared with monthly rent.
Choi In-ho, president of the Korea Housing & Urban Guarantee Corporation (HUG), held a briefing on the jeonwolse safety trust on Aug. 20 in Yeouido, Seoul, and explained the background of the program, saying, "We determined it is time for a new safety net for jeonse and monthly rent to restore trust in the jeonse market damaged by jeonse fraud and to ease the housing cost burden from conversion to monthly rent."
Under the jeonwolse safety trust, the rent stabilization body and the landlord and tenant sign a three-party agreement in which the tenant deposits the jeonse amount with the body, which then manages it and pays the landlord monthly with the revenue generated. Based on the jeonse deposits, the body will create a "dwellings supply activation fund," operate it through HUG-guaranteed project financing (PF) loans, and pay landlords interest revenue in the 4% range annually.
The program is optional and only available if both the landlord and tenant want to join. It will first be rolled out for dwellings with an initial market price of 2 billion won or less, with plans to expand the scope later. There are no restrictions on dwelling types—such as apartments, villas, or single-family dwellings—or on the income or asset levels of landlords or tenants. Half-monthly rent arrangements are also eligible. However, it does not allow a structure in which only part of the jeonse deposit is entrusted to HUG and the remainder is received directly by the landlord.
◇ Tenant: "Monthly expense 740,000 won → 530,000 won" … landlord: monthly rent equivalent to annual 4% range
By joining the jeonwolse safety trust, tenants can reduce the risk of jeonse fraud by getting their deposit back from the stabilization body at the end of the contract. Monthly renters who switch to jeonse using the safety trust can also expect to cut housing costs. If the lending rate on a jeonse loan is lower than the jeonse-to-rent conversion rate, paying loan interest instead of monthly rent is cheaper.
For example, assume monthly rent of 740,000 won for an apartment with a jeonse deposit of 200 million won. If the tenant uses the safety trust and finances up to 80% of the deposit—160 million won—with a loan, the interest expense drops to around 530,000 won per month. That saves about 200,000 won compared with monthly rent. It also eliminates the need to enroll in deposit return guarantees and jeonse loan guarantees, reducing annual guarantee fees by about 340,000 won.
Landlords can receive monthly rent reliably without worrying about arrears. If a participating landlord is a registered rental business operator, the obligation to enroll in the rental deposit return guarantee is waived. Tax support on rental income is also being pursued.
Choi said, "We can guarantee landlords rental returns between 4% and 5% during the contract period," adding, "Landlords who had difficulty finding tenants due to senior mortgages will be more likely to recruit tenants smoothly." Choi added, "The extent of tax reductions on landlords' income will be finalized after consultations with relevant ministries, but there is a high possibility it will be significantly lower than the current 14%."
◇ How many landlords participate is the "key"
The question, however, is whether there is enough incentive for landlords to participate. The government plans to induce participation by paying landlords monthly rent equivalent to interest revenue in the 4% range annually and through tax support, but how many landlords can be persuaded to give up control over a large lump sum may determine the policy's success or failure. Under existing jeonse contracts, landlords received jeonse deposits worth hundreds of millions of won and used them to repay mortgage loans or for business and investment funds. In fact, some landlords are already saying, "Instead of entrusting jeonse deposits to the government, we will receive monthly rent directly."
Another challenge is how to manage the entrusted jeonse deposits to generate revenue stably. HUG plans to pool the trust funds into a dwellings supply activation fund and invest in housing PFs guaranteed by HUG. While HUG says investment management will be stable, investment losses cannot be ruled out, making it critical to determine how to preserve principal.
Choi also said that while operations will adhere to the absolute principle of principal preservation, "investment losses are theoretically possible," and if losses occur, "ultimately, the structure should have the government take responsibility."
HUG will announce the program starting in September and begin recruiting landlords and tenants in October. From November, it will verify whether the jeonse prices of applicant dwellings are appropriate and then support move-ins sequentially starting at the end of the year.