Policy Loans Near 180 Trillion Won... Government Expands Loans for Ordinary Citizens Using Bank Funds

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 b

The balance of real estate policy loans using government funds reached nearly 180 trillion won last year. This represents an increase of almost 12 trillion won compared to a year earlier. It was noted that the government significantly reduced the amount of loans granted directly, while actively utilizing the interest subsidy method based on bank capital.

An interest subsidy is a method in which the government compensates financial institutions for the difference between the policy loan rate and the prevailing market rate. This approach allows the government to expand the beneficiary base with a smaller budget, but as it is a one-time expenditure, the funds are not recoverable. During periods of interest rate hikes, government spending can grow larger than expected, which is why the National Assembly has long voiced concerns about indiscriminate expansion of this method.

According to an analysis report on the 2025 fiscal year settlement published by the National Assembly Budget Office on July 26, the outstanding balance of policy loans using the Housing and Urban Fund last year amounted to 177.8518 trillion won. This is an increase of more than 11.7 trillion won compared to the policy loan balance in 2024 (166.1493 trillion won). By type of lending, the balance of loans directly provided by the government for home purchases or Jeonse funds stood at 39.6126 trillion won, while loans using the interest subsidy method accounted for 138.2392 trillion won.

Didimdol (home purchase fund) and Bogeumjari (Jeonse fund) loans encountered in practice are key policy loans funded primarily by the Housing and Urban Fund. These loans generally offer rates 2–3 percentage points lower than market rates and are available to those who meet certain income and asset requirements. The Housing and Urban Fund, managed by the Ministry of Land, Infrastructure and Transport, is funded through bonds purchased in real estate transactions and subscriptions to housing savings accounts.

In the past, most loans were provided directly from the fund, but in recent years, loans using the interest subsidy method that leverage bank funds have grown rapidly. Until 2021, the share of the interest subsidy method among total policy loans barely exceeded half, but last year it surged to 77.7%. In particular, based on new loans last year, the amount directly lent was only 435.7 billion won, while loans through the interest subsidy method reached 34.0116 trillion won.

A promotional notice for the Housing and Urban Fund Trustee Bank posted at the entrance of Shinhan Bank in Seoul. Photo by Jinhyung Kang aymsdream@

The interest subsidy method enables the government to expand the number of potential loan recipients with limited resources. For example, if the government lends 1 billion won to each borrower directly from a pool of 10 billion won, only 10 people can benefit. However, by employing the interest subsidy method, that number can be increased several times over. Suppose the interest rate difference between policy and bank loans is 2 percentage points. In this case, the bank originally lends 1 billion won per borrower from its own capital, and the government later covers the interest difference of 2 million won per borrower. This allows 500 people to receive loans.

While this approach can increase the range of beneficiaries, it is also cited as one of the main drivers of indiscriminate growth in household lending. The long-term consequences are substantial. Loans granted directly by the government can be recovered after the contract period, but the interest subsidy method constitutes a consumptive expense for the government, as it simply compensates banks for their losses. Estimating future expenditures is also difficult, particularly since many home purchase loans have contract periods exceeding 10 years, making it hard to predict interest rate levels several years ahead while being obligated to compensate banks over a long duration.

The policy loan process last year also raises concerns. The government originally planned to allocate more than 14 trillion won for direct loans at the beginning of last year, but in reality, only 435.7 billion won was disbursed, resulting in an execution rate of just 3%. By contrast, 92% of the initially planned budget for the interest subsidy method was executed, indicating that almost the entire budget was used. The Ministry of Land, Infrastructure and Transport explained to the National Assembly that the execution focused on the interest subsidy method using bank funds due to a lack of surplus in the Housing and Urban Fund.

A promotional poster for jeonse loan guidance posted at a commercial bank in downtown Seoul. Photo by Yonhap News

Despite involving trillions of won in funds sourced from the public, the Ministry made decisions arbitrarily, without any advance notification to the National Assembly or others. Lim Donghun, an analyst at the National Assembly Budget Office, stated in the report, "Despite the fund management plan being established and subject to National Assembly review, the gap between the plan and actual execution is excessive." He further pointed out that "given how concentrated the execution was on a single policy tool, the ministry exercised too much discretion."

He added, "If there was a plan to reduce direct lending and allocate the remaining funds as surplus or to concentrate on the interest subsidy method, it should have been included in the fund management plan and submitted for National Assembly review." He also emphasized, "It is necessary to thoroughly examine the scale of future unrecoverable spending and appropriately determine the size of loans using the fund's own resources before implementation."

The Housing and Urban Fund's lack of transparency has been raised numerous times. Jang Kyungseok, a senior researcher at the National Assembly Research Service, stated, "The current closed decision-making structure is an issue tied directly to the fund's governance and needs to be properly addressed."

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