How Negative Rates Are Affecting Home Mortgage Loans in Japan

By Jeff Wynkoop

It has been a little over six months since the Bank of Japan introduced its negative interest rate policy, and the effects of this policy change are still working their way through the economy.

One of the most important ways the new policy is affecting the economy is in how consumers borrow money for housing loans. Although in the past Japanese borrowers have overwhelming preferred variable interest rate mortgage loans, there are signs this long-established trend is changing.

Consumers Used to Prefer Variable Rate Loans

Home mortgage loans in Japan are usually structured as either (1) variable interest rate loans or (2) loans with an initial 10-year fixed interest term and a variable interest rate for the remaining term of the loan (“10-year fixed loans”).

In the past, Japanese banks set the initial rate used for variable interest loans lower than the initial rate used for their 10-year fixed loans.

The relatively lower initial rate on variable interest loans was considered the benefit the borrower receives for taking the risk that the variable interest rate may adjust upward in the future.

To reiterate, in the past Japanese borrowers have overwhelming chosen alternative (1) above.

Change Since the Beginning of 2016

According to Japan’s largest bank, The Bank of Tokyo-Mitsubishi UFJ, although 70% of new borrowers chose a variable rate loan over a 10-year fixed loan in the first half of 2015, the situation flipped in the first half of 2016, with roughly 70% choosing a 10-year fixed.

In July 2016 alone, MUFJ reported that roughly 90% of new borrowers chose the 10-year fixed, and for re-financings, almost 100% choose the 10-year fixed.

The other 4 of Japan’s big five banks, namely Mizuho, Sumitomo Mitsui, Resona, and Sumitomo Mitsui Trust Bank, are also all reporting an increase in demand for their 10-year fixed loans.

Affect of the BOJ’s Negative Rate Policy on Long- vs. Short-Term Prime Rates

What caused the change in Japanese borrowers’ mindsets, and how does this relate to the BOJ’s negative interest rate policy?

One of the biggest differences between variable interest rate loans and 10-year fixed loans is that banks use long-term interest rates (e.g., newly-issued 10-year government bonds) as a benchmark when deciding on the rate of their variable rate mortgage.

However, banks set the rate of their 10-year fixed loan based on their individual short-term prime interest rate. The short-term prime interest rate is the interest rate each bank sets internally as a benchmark when determining the actual rate to charge for loans of less than one year to preferred (most credit-worthy) borrowers.)

The problem is that although long-term interest rates have come down thanks to the BOJ, banks are resisting changing their short-term prime interest rates, because they don’t want their income to crater on all of the business loans they make.

What this means is that currently the initial rate on the 10-year fixed loan is generally lower than the initial interest rate on variable interest loans.

Please refer to the comparison below of 10-year fixed rates versus variable loan rates for August 2016.

Home Mortgage Loans Japan August 2016

It is interesting to note that even for Sumitomo Mitsui and Mizuho, where the initial variable rate is still below the 10-year fixed, borrowers wishing to refinance are increasingly choosing the 10-year fixed.

Source: Nikkei Shinbun, August 17, 2016

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

Top Photo: Kurashiki, Okayama, Japan

Photo Credit: T.Hagihara via Flickr