Understanding Fixed Interest Rate Home Loans in Japan

By Jeff Wynkoop

People wishing to borrow money for a home loan in Japan have many different issues to consider. One of the most important is how long they want the interest on their loan to be fixed, and how long they are willing to take the risk that their interest rate (and thus monthly payment) may adjust upward. Mortgage loans with variable interest rates in Japan usually reset every six months, so borrowers with a variable interest rate loan are not able to reliably set their budgets on an annual basis. This can be a problem for borrowers on a salary, pension, etc., where income is set on a yearly or longer basis.

Tradeoff Between Fixed and Variable Rates

The main tradeoff between fixed and variable interest rate loans is that fixed interest rate loans have a higher initial interest rate in the usual case. As a general rule, a borrower of a variable interest rate loan usually pays less per month initially, but the quid pro quo is that the borrower takes the risk that interest rates will go up in the future. However, oddly in the last year we have seen reference interest rates (the bank’s internal basic rate) for shorter fixed-term loans have a higher initial reference rate than their ten-year fixed counterparts. For instance, in September 2016 the reference interest rates for SBI Sumishin Net Bank, Ltd. showed the initial reference rate for their ten-year fixed loan was less than the initial reference interest rate for their 2, 3, 5, or 7-year fixed rate loans.

The reason for this is that when banks set the rate for their financial products, the actual interest rate set on loans with a fixed period of ten or more years is heavily influenced by the long-term interest rate current at the time of the loan, and the initial interest rate set on a variable loan (or a short-term fixed, then variable loan) is more closely influenced by short-term interest rates at the time of the loan. When the slope of the yield curve is inverted as it was in Japan earlier this year, strange things happen. This is an important reason why the BOJ decided to introduce its new zero-interest rate policy focusing on long-term rates, i.e., to flatten out the yield curve and keep it from being inverted.

An inverted yield curve is where long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a harbinger of economic recession. The reason for this is that in the inverted yield curve interest rate environment, investors expect the value of short-term debt to plunge in the near term (in other words, the demand for short-term government debt to fall), so there is more demand for loans with longer fixed rates to prepare for this eventuality.

What does this all mean, other than Japan has an unusual financing environment, with generally cheap money and at least the appearance of a decent risk of policy failure by the BOJ?

Total Amount of Loan Repayment

Borrowers should keep in mind that just because a loan has an initial lower monthly payment, this doesn’t mean that the total amount to be repaid over the life of the loan will be less. Borrowers looking to pay back their mortgage loan in less that 15 years usually have more of a buffer to accept the risk of a variable interest rate loan. For people convinced that interest rates will go up significantly in the mid to long term, the peace of mind of having a long-term fixed interest rate mortgage loan may be worth it.

Of course, all of this depends on the actual rates offered to you by your bank, which vary based on many different factors. Always get professional advice prior to taking out a loan, but in any event, it is good to know that one can’t always expect that a variable interest rate loan will be the cheapest in the short or long term in Japan.

You may also be interested in: Basic Requirements for Getting a a Mortgage as a Foreigner in Japan and Mortgage Calculator for Home Mortgage Loans in Japan