Told to Cut Policy Loans, Ministry of Land Instead Lavished Banks with Unilateral Subsidies

Outstanding Policy Loan Balance Approaches 180 Trillion Won

97% of Annual Direct Lending Plan for New Loans Unused

Surge in Interest Rate Subsidy Loan Balances Using Bank Funds

"Execution Skewed to One Method... Excessive Discretion by Land Ministry"

The outstanding balance of government-backed policy loans for real estate, using public funds, approached 180 trillion won last year. This represents an increase of nearly 12 trillion won from the previous year. Notably, while the government drastically reduced the amount it directly lent out, it actively expanded the use of interest rate subsidy methods that utilize bank funds.

An interest rate subsidy is a method where the government covers the difference between the policy loan rate and prevailing market interest rates, paying financial institutions the margin. This allows the government to increase the number of beneficiaries with less money, but since it is a one-time expense and not recoverable, it cannot be collected back. During periods of rising interest rates, government expenditures can exceed expectations, which is why the National Assembly has expressed concerns about the indiscriminate expansion of this method.

Information on Didimdol Loans and others displayed in front of a bank in Seoul. Photo by Yonhap News

According to a fiscal year 2025 settlement analysis report released by the National Assembly Budget Office on the 26th, the balance of policy loans through the Housing and Urban Fund last year totaled 177.8518 trillion won. This figure increased by over 11.7 trillion won compared to the 2024 policy loan balance of 166.1493 trillion won a year earlier. By loan method, the balance of government direct lending for home purchase and jeonse (lease deposit) funds stood at 39.6126 trillion won, while loans using the interest rate subsidy method amounted to 138.2392 trillion won.

In practice, the Didimdol Loans (home purchase funds) and Bogeummok Loans (jeonse funds) encountered at commercial banks are policy loans primarily funded by the Housing and Urban Fund. These Didimdol and Bogeummok loans offer interest rates around 2 to 3 percentage points lower than commercial borrowing, and are available to those who meet certain income and asset requirements. The Housing and Urban Fund itself is financed by sources such as bonds purchased during real estate transactions and subscription deposit accounts, and is managed by the Ministry of Land, Infrastructure and Transport.

While the fund previously favored the direct lending method, loans based on the interest rate subsidy method, leveraging bank capital, have rapidly increased over the past few years. Until 2021, the share of interest rate subsidy loans in all policy lending was barely above half but soared to 77.7% last year. Especially for new loans in the previous year, direct lending amounted to only 435.7 billion won, while loans made through the interest rate subsidy method reached 34.0116 trillion won.

Source: National Assembly Budget Office 2025 Fiscal Year Settlement Report. AI-generated image

The interest rate subsidy method can increase the number of eligible borrowers with limited funds. For instance, if the government directly lends 1 billion won to each of 10 people with a total fund of 10 billion won, only 10 people would benefit. However, with the interest rate subsidy method, dozens of times more people can be served. If the interest rate gap between policy loans and commercial loans is 2 percentage points, the bank first lends 1 billion won per person using its own capital, and the government later covers 20 million won per individual to pay for the interest rate difference. This allows for 500 beneficiaries.

While this expands the pool of beneficiaries, it is also cited as a key factor behind the unchecked increase in household lending. The problems of this method are amplified in the long term. Direct loan repayments can be collected after maturity, whereas interest rate subsidy payments are considered consumptive expenses since they simply cover bank losses. The difficulty in accurately projecting future expenditure levels is another disadvantage. Many home purchase loans have long-term contracts exceeding 10 years, meaning the government has to make long-term commitments to banks under uncertain future interest rate conditions.

The process of handling policy loans last year was also questionable. In the case of direct loans, the plan at the beginning of the year was to spend over 14 trillion won, but in reality, only 435.7 billion won was disbursed, with an execution rate of just 3%. By contrast, 92% of the budget for the interest rate subsidy method was spent, effectively exhausting most of the allocation. The Ministry of Land, Infrastructure and Transport explained to the National Assembly that, because surplus funds in the Housing and Urban Fund (the source for these loans) were insufficient, they executed most lending using bank funds via the interest rate subsidy method.

Despite involving trillions of won in public funds, these decisions were made unilaterally without any prior notification to the National Assembly or other external entities. In the report, Budget Office analyst Lim Donghoon stated, "Even though fund operation plans were established and reviewed by the National Assembly, the gap between plan and execution is excessive," adding, "Given that execution is heavily skewed toward a single policy tool, the Ministry of Land's discretion played an undue role."

He further commented, "If there was a plan to operate the surplus through reduced direct loans and focus on the interest rate subsidy method, this should have been reflected in the fund's operation plan and submitted for National Assembly review." He continued, "There is a need to carefully examine the scale of unrecoverable future expenditures, and to calculate and execute an appropriate scale of lending using the fund's own resources."

The opaque operation of the Housing and Urban Fund has triggered issues on multiple occasions. Senior Researcher Jang Kyungseok at the National Assembly Research Service remarked, "The current closed decision-making structure is ultimately related to the governance of the Housing and Urban Fund, and should be corrected."

Promotional notice for the Housing and Urban Fund trustee bank posted at the entrance of Shinhan Bank in Seoul. Photo by Jin-Hyung Kang aymsdream@

This content was produced with the assistance of AI translation services.