By Jeff Wynkoop
There are a lot of difficult decisions consumers have to make when choosing a home mortgage loan in Japan. Borrowers need to understand the impact these decisions have on the level of their monthly loan payments as well as their impact on the entire repayment amount (i.e., the total cost of the loan to the borrower). The purpose of this article is to outline some of the main considerations consumers need to be aware of when making such an important life decision.
Fixed or Variable Interest Rate or Both?
Most private Japanese financial institutions offer (1) a fixed interest rate home loan, (2) a variable interest rate home loan, and (3) a combination interest rate home loan, with an initial fixed interest rate period and a variable interest rate period thereafter.
The most popular private home loans in Japan are combination interest rate loans, with an initial 5-, 7-, or 10-year fixed period, and variable interest rate during the remainder of the term (usually 20-30 years). Nevertheless, at the time the loan switches from a fixed to variable interest rate, the borrower can choose to fix the interest rate for the remaining term at the then applicable fixed interest rate.
In the usual case, the initial rate on a fixed interest rate loan is higher than on a purely variable interest rate loan. The reason for this is that at the time the bank provides a fixed rate loan, it is taking the risk that benchmark interest rates will rise during the fixed period and make the loan relatively unprofitable. When comparing different combination loans, as a general rule the shorter the fixed interest term, the lower the initial interest rate.
How variable rates work
Variable interest rate loans, or combination loans during their variable period, have their applicable interest rate fluctuate and reset every six months. However, most banks in Japan only change the monthly repayment amount for their home loans once every five years. What this means is that when the variable rate goes up, for a period of time the borrower of a variable rate loan will not experience a change in the amount of their monthly payment, but the total amount to be repaid over the life of the loan will increase.
Two Repayment Options
There are two main types of repayment options for home loans in Japan: a Constant Amortization Mortgage Loan (a “CAM Loan” below, in Japanese 元金均等返済金銭貸借, gankin kintoubensai kinsentaishaku) and a Constant Payment Mortgage Loan (a “CPM Loan” below, in Japanese 元利均等返済金銭貸借, ganri kintoubensai kinsentaishaku).
CAM Loan (元金均等返済金銭貸借)
In a CAM Loan, the total monthly payment for the borrower is determined by first calculating a constant amount to be applied to repay the loan principal each month. Interest is then calculated on the outstanding monthly loan balance and added to the constant principal repayment to compute the borrower’s total monthly payment.
CPM Loan (元利均等返済金銭貸借)
For a CPM Loan, the borrower’s monthly payment amount is constant each month during the term of the loan, resulting in most of the money repaid during the first years of the loan being allocated to paying off loan interest rather than loan principal.
Comparing CAM and CPM Loans
What this means for borrowers is that for a CAM Loan (assuming the interest rate is constant), (1) the actual amount of the borrower’s monthly payment will change and decline over time, and (2) the total amount of interest the borrower will pay to the lender over the life of the loan will be much less than for a CPM Loan of same amount and duration.
Although CPM Loans are more expensive for borrowers (since the total amount of interest paid is higher), the advantage of a CPM Loan is that the level of monthly payments is lower than the initial monthly payments for a CAM Loan of same amount and duration, and the borrower’s monthly payments do not fluctuate over the life of the loan (provided the interest rate is constant).
Because CAM Loans usually require relatively high monthly repayment amounts at the beginning of the loan term, oftentimes borrowers can afford monthly CPM Loan payments but do not have enough income to qualify for a CAM Loan.
Most mortgage loans in Japan are structured as CPM Loans, although there are a few private financial institutions that offer CAM Loans as well.
The Flat 35 loan, the 35-year public/private mortgage loan offered by most private banks and sponsored by the Japan Housing Finance Agency (the “JHFA,” a quasi-government agency similar to Fannie Mae in the US or the Canada Mortgage and Housing Corporation) can be structured as a CAM Loan or a CPM Loan, and home loans offered through an employer’s sponsored home mortgage program (so-called 財形融資 or zaikei yuushi programs) can also be structured as either a CAM Loan or CPM Loan.
Different Lender Options
The main home loan lenders in Japan are private banks, local credit unions, zaikei yuushi programs offered by certain employers and provided by the JHFA, and private banks offering the above-mentioned public/private Flat 35 (or Flat 50) loans.
Banks and Credit Unions
A majority of Japanese borrowers elect to use a privately tailored loan from a bank or credit union because they have more flexible repayment plans and interest rate options, and usually there are neighborhood branches for in-person consultations.
The right of borrowers to make early repayments without penalty is another important factor in the popularity of these loans.
Further, private banks and credit unions tend to be more flexible in changing loan conditions, etc. mid-term, although as a tradeoff the initial screening process takes more time to complete and is more thorough. It is also sometimes possible to get a special interest rate through a cooperative program offered by a bank teaming up with a specific residential developer.
Zaikei yuushi programs tend to have relatively low interest rates, but are only available to employees of participating companies.
Flat 35 Loans
A Flat 35 loan must be a fixed interest rate loan during the entire 35-year term. Although generally borrowers with lower personal incomes may be able to qualify for a Flat 35 loan, the conditions set by the JHFA for such loans are rather rigid, and allowance for exceptional circumstances virtually non-existent. Also, since Flat 35 loans are offered through private financial institutions, the actual interest rate and various loan fees for a Flat 35 loan can vary considerably depending on the lender.
Recently annual interest rates on Flat 35 loans have begun to move higher. The base rate set by the JHFA for Flat 35 loans for January 2017 is 1.12%, an increase of .02% from December 2016. Moreover, this is the second month in a row that the rate increased. The base rate for Flat 50 loans in January 2017 is 1.58%, which is also a .02% increase from the prior month. JHFA’s base rate for Flat 35 loans hit an all-time low last August at 0.9%, which caused a rush of borrowers switching from variable interest rate loans to Flat 35 loans. The number of applications for Flat 35 loans has fallen from a peak of over 14,000 in August 2016 to roughly 11,000 in November 2016.
Range of Available Interest Rates
It is important for borrowers to know that there is a range of possible interest rates lenders may give for the same loan depending on the lender’s assessment of the borrower. In Japanese the reduced rates are called 優遇金利 (yuuguu kinri, in English preferred rates) or 引き下げ金利 (hikisagekinri, in English discounted rates).
According to a 2016 report by the Ministry of Land, Infrastructure, Transport, and Tourism, private financial institutions primarily assess borrowers based on (1) their age at the time the loan will be fully repaid, (2) the condition of their health, and (3) an appraisal of the asset to be mortgaged. Interestingly, the borrower’s income level is not one of the top three criteria for home loan lenders in Japan.
Life Insurance Related to Home Mortgage Loans
It should be noted that there is also a special insurance policy for borrowers wishing to be protected from a long-term illness or death preventing full repayment of their mortgage loan. This is called 団体信用生命保険 in Japanese (dantai shinyou seimeihoken), and buying this type of insurance is a requirement for many lenders depending on the type of home loan. Oftentimes the actual insurance fee is included in the borrower’s monthly payments, although sometimes it requires a separate payment.
Editor’s note: There are also special considerations for getting a home mortgage from a Japanese bank as a non-Japanese. Please see this article for information on basic requirements for getting a mortgage as a foreigner in Japan.