Banks set to use pre-sale prices, not appraised values, as basis for balance payment loans

Banks are moving toward using pre-sale prices — rather than appraised values — as the basis for balance payment loans, a follow-up measure to the government's Aug. 13 real estate package. With total lending capacity across the financial sector fixed, using pre-sale prices is the only way to distribute loans broadly enough to reach as many borrowers as possible. As a result, loan limits available to prospective move-in buyers are expected to come in lower than initially anticipated.

Financial authorities and banks are discussing follow-up measures to the Aug. 13 real estate package, according to industry sources Sunday. The centerpiece is raising the annual household loan growth target for the financial sector from 1.5 percent to 3.0 percent, with up to 30 trillion won ($21.5 billion) to be channeled toward first-time buyers and young borrowers.

Financial authorities have decided to manage group loans — including balance payment loans and interim payment loans — under a separately designated reserve quota drawn from the sector-wide total, rather than counting them against each individual bank's own cap. The change allows banks to extend group loans more actively than before.

Under the Aug. 13 package, Shinhan Bank raised its balance payment loan limit for the DIH Bangbae development from 150 billion won to 400 billion won, Hana Bank from 100 billion won to 350 billion won, and KB Kookmin Bank from 100 billion won to 300 billion won. Banks plan to assign balance payment loan limits sequentially to other developments scheduled for move-in this year as well.

Even so, banks have settled on using pre-sale prices — not the conventional standard of appraised values — as the basis for these loans. For most developments currently approaching move-in, a significant gap has opened between the original pre-sale price and the current appraised value. Using the appraised value would substantially inflate loan amounts, and the reserve quota could be exhausted quickly, leaving many prospective buyers unable to secure financing.

KB Kookmin Bank and Shinhan Bank are currently offering balance payment loans for DIH Bangbae at whichever is lower: 60 percent of the pre-sale price or 50 percent of the appraised value. Given the wide gap between the two figures, loan limits are in effect being calculated on the pre-sale price. Other developments are expected to follow a similar approach.

"If we use the appraised value as the standard, we will see more cases of people taking on excessive debt relative to their actual funds to buy a home," an official at a major commercial bank said. "Buyers would have drawn up their financing plans based on the price at the time of pre-sale, so it makes sense to lend in line with that."

For some prospective buyers, a pre-sale price-based limit could leave them short. The pre-sale price for an 84-square-meter unit at DIH Bangbae was 2.2 billion won, which at 60 percent yields a loan ceiling of 1.32 billion won. By contrast, if the current market price of 4 billion won were used as the appraised value, the limit would rise to 2 billion won. The wide gap between the two figures has prompted a flood of complaints to banks demanding that loans be processed using the appraised value instead.

Banks accordingly asked financial authorities at a Wednesday meeting to issue government-level guidelines on the standard for balance payment loans. There were also calls for separate guidance covering high-priced properties in Seoul's Gangnam area, such as DIH Bangbae.

Financial authorities stopped short of issuing clear directives in response, but indicated they plan to review how group loans are being handled in September. "It is difficult for the authorities to set a specific direction at this point," a senior financial authority official said. "We will proceed in consultation with the industry."

"Saying they will review group loan conditions ultimately means banks should use their own judgment to lend responsibly," a lending officer at a major commercial bank said. "Even though these loans do not count against our own quota, we have no choice but to be as conservative as possible."

Financial authorities are working to complete the allocation of loan quotas for individual banks by the end of this month. Banks that managed their lending responsibly before the Aug. 13 real estate package was announced will receive larger allocations.

Even after receiving additional quota, banks plan to maintain individual borrower limits — including restrictions on mortgage insurance products — for now as a demand management measure. As financial authorities have urged an end to early-morning queuing for loans, banks are considering easing some channel-level restrictions such as daily loan caps.

Financial authorities plan to raise the share of mid-rate loans excluded from the household lending quota. Currently, only 30 percent of the amount extended is excluded; a proposal to raise that share to around 50 percent is under review. Amounts excluded from the quota would be deducted from the reserve pool. Loans extended to young borrowers would also receive a partial quota exemption as an incentive to encourage more active lending to that group.

Banks are preparing to launch their own mid-rate loan products in response. Shinhan Bank on Thursday introduced "Super SOL Mid-Rate Loan," offering up to 20 million won at annual rates of 5 to 6 percent to borrowers in the bottom 50 percent of credit scores, with a total supply target of 600 billion won. Woori Bank is also reviewing the launch of its own product. NongHyup Bank rolled out its "NH All-One Wonderful Happy Together Mid-Rate Loan" on Aug. 4.

Financial authorities plan to grant additional lending capacity to second-tier financial institutions — including mutual finance cooperatives, credit card companies and savings banks — under the Aug. 13 package. As with banks, those that managed their quotas responsibly will receive larger allocations.

For mid-rate loans extended by second-tier lenders, authorities have decided not to deduct the amounts from each institution's own quota. Mid-rate loans from second-tier lenders processed from Aug. 1 onward will instead be deducted from the sector-wide reserve pool. Group loans from mutual finance cooperatives and savings banks will be handled under the same standards as those at banks. "The intent is to push for more active lending to vulnerable borrowers," a financial authority official said. "We also asked that policy loans beyond mid-rate products be supplied more actively."