Mortgages in Korea

[hello1234]

Hi All,

Any non-Koreans here have experience in obtaining a residential mortgage in South Korea? I can't seem to find anyone who has knowledge of this area!

(Note: In Korea, tenants can pay landlords a lump-sum deposit equivalent to up to 80% of the value of your property. However, in return, the landlord does not charge rent)

In theory, if I can get an 80% LVR loan for a $200k apartment - I can potentially be handed with up to $160,000 cash. Then I can invest that cash in higher yielding investments OR use that as a deposit for the next place and keep rolling etc...

Any help would be great.

Thank you.

 

[Meisterin]

I would think that you would need to be in Korea and have an alien registration number. Without the registration number no bank will lend you any form of money in Korea. As long as you have the alien registration number and you have property in your name it is easy to borrow from the banks. No strict rules of LVI or DSR. You can actually buy the property(sign the contract), ask the real estate to find a renter, and have both settlements take place at the same time so you will not need to get any bank moneys involved. But the only downfall is you have to be there in person to oversee everything as people don't believe in or trust power of attorney and transaction gets a little complex at times.

We have a property in Korea, but for capital gain tax and other tax issues in relation to foreigners- depending on the time of purchase applicable tax laws change but not for the Korean nationals- we are keeping the property in our parent's name. When Korea is in need of foreign investment, and government announces that there will no tax applicable to foreigners for real estate purchase, that's time time you should buy. That period does not last for more that a couple of years each time. So if you are buying as a foreigner you really do have to be careful.

As a general rule, if you are a foreigner and selling, before settlement you have to produce a receipt for paying capital gains tax which could be up to 60%, before receiving any money because lot of foreigners have fled the country after the disposal of assets.

In relation to what we did is, we bought a property for $100K 4 years ago, and used the Korean rental system and got $65K in lump sum from the renter(very bearish market at the time), and raised another $20Ks for each renewal and we are looking to raise another $20-30K at the end of next year. The current rent price is about $20K higher than last year and we are hoping that it will rise by another $10-$15k by end of next year.

The rent moneys have surpassed our purchase price at the second renewal, so we are quite happy. (we have recouped our initial investment-and none of our moneys in the property) Also the property is leased within 24 hours of advertising so we never really needed to send the money back to Korea. It sits in our offset. We receive the money from the incoming renter to hand it over the outgoing renter and keep the difference each time. And the good thing is we still have some equity in that property worth about $30-50K.

Purchase price $100K
Rent$65K
Initial investment $35K (or equity)

2 years later
Market price $110-30K
Rent $85K
Initial investment:$ 15K (brought $20K to AUS)


2 years later(end of last year)
Market price $150K
Rent $110K
Initial investment: -$10k (brought further $25K to AUS)
Equity: $40K

So if we sell now, we can still bring home further $40K and none of our initial investment is there.

 

[hello1234]

Meisterin, seems like getting the alien registration number is probably the easier side of things.

Which area is your $100k property located?

Also, where can I find such deals? Are there any English websites which lists these?

 

[Meisterin]

My property is in Gyeongsan, very close to Daegu which is about 400Km from Seoul. There was a hike in the property price when new subway station got built 2 years after our purchase.

I am not sure whether you can find information in English. There is a government site where I visit regularly to check the recently sold and rent prices. It gets updated every month and that's how I check the property market in Korea.

http://rt.molit.go.kr/

 

[Nattl3s]

Just read these posts out of interest. How strange..... So if im reading correctly your tenant in the first instance paid $65k to rent your house for 2 years? Why don't they just use that money to buy their own house for $100k? Are these tenants not regular people ie some sort of government/industry/ commercial /foreigner who cant invest type housing? Cheers, nat

 

[hello1234]

Just read these posts out of interest. How strange..... So if im reading correctly your tenant in the first instance paid $65k to rent your house for 2 years? Why don't they just use that money to buy their own house for $100k? Are these tenants not regular people ie some sort of government/industry/ commercial /foreigner who cant invest type housing? Cheers, nat

Nattl3s, the tenant basically "lends" that $65k deposit to the landlord, however in return the landlord let's the tenant live rent-free for 2 x years.

At the end of the 2 years, if the tenant decides to move, the landlord is obliged to return the $65k in full.

Otherwise, a renewal will possibly be more expensive - the landlord may ask for $75k instead...then $85k...then $95k...and eventually this deposit will end up more than what the landlord paid for the property!

 

[jameso]

So they basically rent the house for free?
Who covers outgoings?
Could be a huge mess if you re invest the deposit and loose it.

 

[Nattl3s]

Nattl3s, the tenant basically "lends" that $65k deposit to the landlord, however in return the landlord let's the tenant live rent-free for 2 x years.

At the end of the 2 years, if the tenant decides to move, the landlord is obliged to return the $65k in full.

Ah... thanks! I thought I had misunderstood something vital to this scenario. Lol. What an interesting arrangement. Cheers, nat.

 

[imbi3]

what is the landlord does not want to return the bond or does not have the funds to return it? is this a common arrangement in Korea? apart from the obvious capital gains, why would a landlord enter into this arrangement?

 

[Paul@PFI]

Australia has a similar system for aged care. Accomodation bonds are held by the village and the village keeps any earnings. Effectively its a loan. Its Govt backed. Some retentions occur in some villages but it is capped and limited. Depending on the tenants other income determines if they pay a base accommodation charge (paid by a % of pension) or more. The accom charge incl meals etc. Effectively some get "free" rent from their bond.

When resident dies or moves out they get their $$ back. Less retentions if any.

 

[Meisterin]

This is a very common agreement in Korea and it is called "jeonse" and you register your interest as "seipja" in the land titles office. Unless the landlord returns the money you don't sign the papers to take the 'seipja' off the title and you can stay there until you get your money returned. I guess it works very similarly to caveats here. Once the bank sees that there is "seipja" on title then they will not lend money. And the potential renter will check the title to see if there is any mortgage to determine the amount of rent. For example in the following scenario:

Cost of property: $100K
Mortgage: $30K

The rent is determined (100K-30K) x 70%= 49K for two years.
If there was no mortgage on the property then the rent will be somewhere between 65-85% of the market value of the property at the time of signing the property.

So that is why you sometimes see in the land titles registry really cheap rents being registered. You can automatically assume that there is some type of mortgage held by the bank.

One good thing about investing in Korea is all the outgoings are paid for by the renter. Except that end of the tenancy the landlord must return the portion of strata sinking fund called "jangkisuseonchundangeum" which has been paid for by the renter. It's probably about 10% of strata fees paid for by the renter.

And other expenses you have to expect are land tax or residence tax which is determined by the value of the property. For a property worth $100K it will be somewhere around $300-500 per year. And if you do not have a job in Korea you will have to pay national medical insurance also determined by the value of your total real estate assets in Korea. So if you don't have a job the amount of medical insurance levy can be large as your job normally pays for medical insurance. That is why if you want to own multiple properties in Korea it is advisable to own the property in the name of the spouse who is covered under national medical insurance. Hence another reason owning the property in my parent's name, as she is covered by my sister's national medical insurance.

Luckily my husband "found" a job in Korea last year, which means we are both covered by national medical insurance in Korea, and hence can transfer the property into our or my name when the current tenancy ends, even though we both work in Australia.

 

[Meisterin]

In Korea there is also a lot of demand for "jeonse" because people don't necessarily want to buy properties in the areas close to their jobs. For example, my uncle bought a property in Seoul but lived in Daejeon renting for about 20 years because of his job.

Another uncle works in the airport and he is renting near the airport but has his property in a better area. But now retired returned to his property.

There are lot of job transfers in Korea between different cities and its part of your job that you be transferred every 2-3 years for the duration of you job. My brother-in-law is transferred every 2nd year to a different city. But they have bought a property in their home town but renting in different towns each time he gets the transfer.

My cousin who is in mid thirties has money to buy but is not buying because they have not decided where to settle. So while they have two little kids they are renting in the same apartment complex as her parents and getting them to look after 2 kids under the age of 3.

Most couples start out with jeonse and only decide to buy when their kids reach school age. So there is good market for rent.

 

[hello1234]

This is a very common agreement in Korea and it is called "jeonse" and you register your interest as "seipja" in the land titles office. Unless the landlord returns the money you don't sign the papers to take the 'seipja' off the title and you can stay there until you get your money returned.

If I am a landlord and the tenant has placed a "seipja" in the land titles office on my apartment, will I be able to get any sort of mortgage on the property?

 

[Meisterin]

If I am a landlord and the tenant has placed a "seipja" in the land titles office on my apartment, will I be able to get any sort of mortgage on the property?

Probably not.

So the best thing is what we did. Got the loan (very easy to get 70-80% lend, no proof of income required) and signed the lease which stipulated that all the mortgage be paid off. So we got the money and paid the mortgage off(took the mortgage off the title) and registered the 'seipja". This all happens at settlement at the land titles office.

If the price of 'jeonse' dropped we would have to borrow money to pay the tenant back at the end of the lease. But that wasn't the case and we were very lucky as no bank will lend if they will not be the first one registered under the title.

If you are on good terms with the real estate agent you could ask him to ask the tenant to remove the 'seipja' for a week and register again after the bank has registered their mortgage. Some naive tenants do this but sophisticated tenants will not agree unless their rent is dropped to an appropriate level.

 

[hello1234]

What transactional overheads are there when buying in Korea? (i.e. stamp duty? LMI? etc)