Rising JGB yields put pressure on banks
Japan’s four major banks have announced that they will raise their 10-year fixed housing loan rates for the third consecutive month in October. The hikes come as Japanese government bond (JGB) yields rise after the Bank of Japan (BOJ) effectively raised its 10-year JGB yield cap to 1% from 0.5% in July. On Friday, the benchmark yield briefly hit a 10-year high of 0.77%.
The BOJ’s policy shift was aimed at easing the side effects of its ultra-low interest rate policy on the financial sector, which has been suffering from shrinking margins and profitability. However, the move also increased the borrowing costs for households and businesses, especially for long-term loans such as mortgages.
According to data from the Japan Housing Finance Agency, the average interest rate for new housing loans in Japan rose to 1.11% in August, up from 0.99% in June, before the BOJ’s announcement. The rate was the highest since January 2019, when it stood at 1.13%.
How much will mortgage rates increase?
The four major banks – Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), Mizuho Financial Group and Resona Holdings – said they will raise their 10-year fixed housing loan rates by 0.05 to 0.1 percentage point in October.
MUFG and SMFG will increase their rates to 1.15% and 1.2%, respectively, from the current 1.1%. Mizuho will hike its rate to 1.25% from 1.15%, while Resona will raise its rate to 1.3% from 1.25%.
The rate hikes will affect new borrowers who apply for housing loans from October 1. Existing borrowers who have already signed contracts with fixed rates will not be affected.
The banks said the rate hikes reflect the rising costs of funds in the market, as well as their efforts to improve their profitability amid a challenging business environment.
What are the implications for home buyers?
The higher mortgage rates will increase the monthly payments and interest expenses for home buyers who take out new loans or refinance their existing loans.
For example, a borrower who takes out a 10-year fixed housing loan of 30 million yen ($270,000) at a rate of 1.15% will have to pay about 262,000 yen ($2,360) per month and about 4.5 million yen ($40,500) in total interest over the loan period.
If the rate rises to 1.25%, the monthly payment will increase by about 2,000 yen ($18) to 264,000 yen ($2,378), and the total interest will increase by about 240,000 yen ($2,160) to 4.74 million yen ($42,660).
The higher mortgage rates may also dampen the demand for housing, especially in urban areas where prices are already high. According to a survey by the Land Institute of Japan, the average price of a new condominium in Tokyo’s 23 wards rose by 6.4% year-on-year to a record high of 71.8 million yen ($646,200) in August.
How will the housing market react?
Some analysts expect that the higher mortgage rates will have a limited impact on the housing market, as they are still relatively low compared to historical levels.
They argue that the demand for housing remains strong due to factors such as population growth in urban areas, low supply of new units, tax incentives for home buyers and investors, and expectations of further price increases.
They also point out that many borrowers opt for variable-rate loans or hybrid loans that combine fixed and variable rates, which are cheaper than fixed-rate loans. According to the Japan Housing Finance Agency, variable-rate loans accounted for about 60% of new housing loans in August, while hybrid loans accounted for about 20%.
However, other analysts warn that the higher mortgage rates may pose a risk to the housing market if they continue to rise or if they trigger a decline in consumer confidence and spending.
They say that the higher borrowing costs may erode the affordability and attractiveness of housing, especially for first-time buyers and low-income households. They also say that the higher interest expenses may reduce the disposable income and savings of households, which may affect their consumption and investment decisions.
They suggest that borrowers should carefully assess their financial situation and repayment capacity before taking out or refinancing a housing loan, and consider various scenarios such as changes in income, expenses and interest rates.
