The many methods of rental payments in South Korea
Before assignee’s arrive in South Korea, it’s important for them to understand the variety of ways to rent a property. In general, there are three different rental payment methods in South Korea, and a mix of all three is typically used in any given city.
Jeonse, Wolse, and the standard monthly rent system
Key money, or Jeonse (전세), is a leasing system unique to South Korea. The Jeonse system involves depositing up to 50% of a property’s value (however, it can be as high as 60-80%) with the landlord for the duration of the lease. The landlord takes the large deposit, invests it, and keeps all the interest earned on the sum. The tenant's deposit is protected by having a lien issued against the property for the amount given. The entire amount is then returned to the tenant at the end of the lease. In cases where there’s damage to the property, key money would be used to repair the unit.
After the deposit is handed over, the tenant can occupy the property for the duration of the lease, typically twenty-four months. The tenant is responsible for paying utilities, along with internet, phone, cable, etc. The Jeonse system is traditionally used in the domestic rental market with Korean nationals.
The deposit plus monthly payment system, or Wolse (월세), is a variation on key money. This process involves having a tenant put down a smaller deposit worth one to two years of rental payments. The tenant would then make monthly payments of about a twentieth to a tenth of the total deposit. Like the Jeonse system, the tenant is also responsible for utilities and other costs.
Standard Monthly Rent System
The standard monthly rent system is comparable to that used in most other countries. Expatriates and their employers tend to favor this system, and some landlords are beginning to prefer the advantages of receiving a nonrefundable deposit, typically 1-2 month's rent, up front in addition to regular monthly payments.
Understanding the potential risks as a tenant in South Korea
Before assignees commit to a rental property, it’s important to understand the potential risks for each method of payment. As the standard monthly rent system is nearly universal, we’ll focus on the Jeonse and Wolse systems of payment that are unique to South Korea.
The main drawbacks of Jeonse and Wolse are essentially the same: dishonest landlords, variable interest rates, and a rising housing market. Although, the Jeonse system tends to incur more of a risk because the amount of money to lose is higher.
Some landlords may have an exorbitant amount of overdue taxes. In such cases, the government may put the apartment up for auction to collect the overdue taxes. When the apartment is sold, the government collects what is due from the profits of the auction. Since national tax (국세) and local tax (지방세) take a higher priority than the tenants Jeonse, they may lose some or all of their deposit, depending on how much their landlords owe the government.
Due to the sheer amount of a Jeonse deposit, it is a common practice that tenants acquire the money through a bank loan. Recent reports cite that the average cost of a Jeonse lease in Seoul is roughly $300,000 USD. If they take out a loan with a variable annual percentage rate (APR), which is the typical practice, they are exposed to the risk of rising interest rates. However, banks do tend to provide very low APRs (around 2-4%) as the deposit is considered collateral.
Jeonse tenants are taking a short position in the housing market. When an apartment rent decreases, the amount of Jeonse deposit should decrease proportionally, but this does not always happen. As a result, the tenants should recoup the difference at lease renewal. And, likewise, when an apartment rent increases, the Jeonse deposit theoretically also increases, and the tenant should pay more to fill the gap when renewing the lease.
No matter which payment system is used, it is important for expatriate assignees to be aware of the unique and often confusing aspects of the Korean rental market.
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