The Korean financial authorities are planning to announce a detailed roadmap next month for the introduction of a “shared equity mortgage.” This initiative aims to make home ownership possible with just about 10% of the home price as cash. By allowing homebuyers to procure the remaining funds as equity instead of traditional loans, the initiative seeks to reduce household debt and alleviate the financial burden on citizens. However, concerns have been raised about potential public losses if property prices fall and the possibility of the government inadvertently driving up real estate prices.
According to financial circles, the shared equity mortgage involves the Korea Housing Finance Corporation acting as an equity investor when individuals purchase a home. This is meant to support young people and those without homes who have limited financial resources by reducing the initial capital needed for home purchasing.
For example, currently, to buy a house valued at 1 billion KRW (approximately $850,000), with the loan-to-value ratio (LTV) set at 70%, buyers need to secure a cash deposit of 300 million KRW (about $255,000) even after borrowing 700 million KRW from a bank. With the shared equity mortgage, the housing finance corporation would invest 500 million KRW, allowing buyers to own a home with just 150 million KRW (about $127,500), which is 30% of the remaining half.
While buyers will pay a fee for the housing finance corporation’s share, it is expected to be lower than current market interest rates, thereby reducing the financial burden. Buyers can also purchase additional equity from the corporation over time, and any capital gains from selling the house will be divided according to each party’s share.
The risk, however, lies in a potential decline in property prices, where the housing finance corporation, as a secondary investor, would incur losses. This raises critiques about the government bearing individual investment risks with taxpayer money. Concerns also suggest that while the aim is to manage the growing household debt, it might ironically fuel further real estate price increases. Similar initiatives were attempted under previous administrations but faced lukewarm market responses during periods of rising house prices.
The authorities plan to gauge market feedback through a pilot project in the second half of the year, which will involve around 1,000 homes with a budget of approximately 400 billion KRW. Considerations are being made to limit the program to properties below specific regional median prices, such as 1 billion KRW in Seoul, 600 million KRW in Gyeonggi Province, and 400 million KRW in regional areas. Financial Services Commission Chairman Kim Byeong-hwan has acknowledged the concerns and mentioned ongoing discussions with relevant institutions about the detailed implementation plan.