By Jeff Wynkoop
Whether looking for an investment property or a new residence in Japan, one of the first steps for prospective buyers is finding a lender. In the past, Japanese banks refused to provide a loan to non-Japanese borrowers (unless the borrower was resident in Japan and married to a Japanese citizen, in which case the spouse would be required to co-sign).
However, currently foreigners living in Japan on a permanent resident visa can qualify for a mortgage loan from a variety of Japanese and foreign financial institutions, provided the borrower has sufficient income and can meet other lending criteria specific to the lender. Some lenders will even work with foreigners without a permanent visa. However, the acceptance of English documentation for mortgage loans is far from universal, and normally all relevant documents will need to be executed in Japanese.
Home mortgage loans in Japan are usually structured as variable interest loans or loans with an initial 10-year fixed interest term and variable rate for the remaining tenor. To supplement options on the market for long-term fixed interest loans, the Japan Housing Finance Agency (the “JHFA,” a Japanese public corporation similar to Fannie Mae in the US or the Canada Mortgage and Housing Corporation) has a program called Flat 35 to support the Japanese residential lending market. Flat 35 loans are fixed interest loans with terms of 15 to 35 years, offered by a wide variety of Japanese banks, and securitized after drawdown by the JHFA. To qualify however, the house to be mortgaged must satisfy certain special JHFA conditions (e.g., energy efficiency standards, earthquake resistance measures, etc.). Also, please note that interest rates for fixed interest loans are higher than the initial rate used for variable interest loans, the quid pro quo being the risk of variable interest rate loans adjusting upward.
Even Total Payments or Even Principal Payments
In Japan, it is common for borrowers to be able to select from two different repayment plan options: the ‘even total payments option’ and the ‘even principal payments option’. For the even total payments option, the borrower makes uniform payments to the lender over the term of the loan, whereas for the even principal payments option, the monthly installment payment on the loan is high initially (high initial interest expense) and slowly decreases over time. In considering whether the even principal payments option is most suitable, borrowers need to balance the burden of high initial payments against the benefit of relatively lower total interest expense over life of the loan.
When applying for a mortgage loan in Japan, typical documents required include 2-3 years of the most recent Japan income tax returns, a residency certificate issued by the local legal affairs bureau, land survey papers and title registration documents evidencing the location of the property and the name of all registered owners to date, and an inkan shoumeisho (proof of personal seal issued by the local ward office). Most banks have a two-step approval process, with an initial application screening and then further procedures depending on the total amount to be borrowed, etc. In addition, penalties for early repayment are common in Japan.
Loan-to-Value (LTV) Ratio
The LTV (“loan to value”) ratio is an important number for every borrower to know, since the LTV ratio approved by the bank will be an important factor in determining how much the borrower must come up with separately to pay the purchase price. For example, if the bank approves an LTV ratio of 70%, then the bank will not lend more than 70% of the value of the property, and the borrower will have to pay the remaining 30% of the purchase price from their own funds. In addition, LTV levels are usually based on the bank’s separate appraisal of the property, and in the event the bank’s valuation is less than the purchase price, the borrower will have to pay this deficiency as well as the remainder of the price not covered by proceeds from the mortgage loan. There are additional application fees, guarantor fees, insurance fees, judicial scrivener fees, and other closing costs and taxes (acquisition tax, registration tax, etc.) not covered by the proceeds of the loan which borrowers should budget for, so that generally borrowers should prepare to pay an amount equal to at least 20-30% of the purchase price (depending on the approved LTV ratio, etc.).
Investment Property Loans
For those looking for an investment property in Japan, interest rates are extraordinarily low when compared to other countries in the region. Although lenders charge borrowers higher interest rates on loans for houses bought as an investment rather than a personal residence, it is still possible to find investment opportunities with positive deal spreads (i.e., where income covers debt service payments as well as other ordinary expenses). Nevertheless, LTV ratios for investment property loans are usually lower than for regular home mortgage loans, meaning the total amount the borrower must pay out-of-pocket will be higher for investment properties.