Reconstruction Balance Loans: LTV Up to 40% Based on Post-Completion Value
To alleviate the burden of remaining payments for reconstruction and redevelopment association members, the government has expanded the criteria for loan limit calculations from existing home values to the prices of the new apartments upon completion. Consequently, members can now borrow up to 40% based on the value of their new home (post-completion asset value), making fundraising significantly easier.
Tighter lending regulations have created difficulties for the relocation of project association members. Following the October 15 measures last year, balance loans for redevelopment and reconstruction sites where relocation commenced were capped at 600 million won, narrowing the scope for securing relocation funds. Particularly in redevelopment projects, where existing asset values are lower than market prices with premiums, it was difficult to cover relocation costs solely based on loans calculated on existing home values. There was also a double burden: resident members had to secure new housing, while landlord members had to return tenants' lease deposits. This resulted in a widening gap between relocation costs and loan limits.
Association members who found it difficult to relocate far from their existing residences flocked to surrounding areas where prices had already risen due to development and relocation demand. Unable to cover costs with bank loans alone, some members opted for additional relocation loans offered by the association at relatively high interest rates. However, the limits for these loans also varied depending on the association's ability to raise funds.
The rationale behind the government's adjustment is the nature of the relocation loan. Authorities determined that loans for association members' relocation are intended to assist those forced to move due to project progression and are unrelated to real estate speculation. The government recently clarified that it views post-completion asset value as the 'member allocation price,' leaving specific judgments to the discretion of financial institutions. As this is a discretionary judgment, actual approved amounts will fluctuate based on financial institutions' assessments.
Even with the change in criteria, the 600 million won limit remains intact. Once a relocation loan is taken, the available limit for the subsequent balance loan decreases by that amount. Due to rising construction costs, the burden on members, including allocation prices, has increased significantly. Members with low pre-existing asset values can only raise funds through loans up to 600 million won, including relocation loans.
Kim Ye-rim, Managing Partner at Law Firm Simmok, stated, "There is a high necessity to prepare a specific funding plan in advance."
