By Jeff Wynkoop
The number of people taking out variable rate mortgage loans in Japan has hit a new all-time high. In the second half of the fiscal year 2017, 56% of all new mortgages were variable rate loans, which represents a year-on-year increase of 9% over the same period in 2016. In addition to the extremely low interest rate environment, variable loans have become more attractive because the competition between banks to give ultra-low fixed term loans, which began when negative interest rates were instituted, has lessened. This means that the number of households that will be affected when interest rates in Japan rise has been steadily increasing since last year.
Interest rates for variable rate mortgages reset every six months based on short-term interest rates. The monthly repayment amount can therefore go up or down during the loan term. The base rate for variable interest mortgages is a little lower than for mortgages with an initial 10-year fixed rate, which saves borrowers a little money every month. In the last five years, fixed rate mortgages were more popular, but variable rate mortgages have come back and now are at the highest percentage in history.
The situation versus ten years ago
Ten years ago, the percentage of variable rate mortgages was about 20-30% of all mortgages. In 2011-2012, the percentage of variable rate mortgages exceeded 50%, but after the Bank of Japan began its new qualitative and quantitative monetary easing policy in April 2013, some borrowers became worried about the risk of rising interest rates and so fixed rate mortgages became more popular.
Due to lower base interest rates, variable mortgages have become attractive. The prices for goods and services have not increased much since the new BOJ monetary policy, and some are suspicious whether we will ever see 2% inflation in Japan again. In addition, the interest rate competition between banks for ultra-low fixed interest rates has slowed.
MUFJ’s current base rate for a variable mortgage is 0.625%. The base rate for the initial ten-year fixed loan was 0.5% before February last year, but now it is 0.85%. Accordingly, variable mortgages are relatively cheaper than the initial ten-year fixed.
More borrowers are refinancing
Another factor is that the number of people refinancing is increasing. According to the Ministry on Land, Infrastructure, Transport and Tourism, in fiscal 2016 refinancing an existing mortgage loan represented 25.3% of all new mortgages, a 10% increase from the prior year. Some lenders say this shows borrowers who are refinancing are more willing to take on variable interest rate risk, since the remaining repayment term for their loan is shorter than for a brand-new mortgage.
However, not everyone is choosing a variable loan mortgage after weighing the pros and cons of fixed versus variable rate loans. According to a survey of the Japan Housing Finance Agency, the percentage of variable interest rate borrowers who say they have no plan to deal with the risk of higher interest rates went up 4% to a total of 19.9% during the second half of 2017. In the event short term interest rates go up, and monthly repayment amounts are reset too high, these borrowers may face serious financial troubles.
Changes in homeownership
It is also interesting to note the changes in homeownership. According to the Ministry of Internal Affairs and Communications, the number of households of two or more people (with at least one person working) who own their own residence is increasing, especially among younger households. In the five-year period between 2012 and 2017, the number of these households of 30-39 year olds owning their own residence went up 9.7% to a total of 62.5% in 2017, which is the highest percentage of ownership for these households this century.
Source: Nikkei Shinbun, July 4, 2018
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