FP is surprised that the power couple who purchased a “billion-dollar condominium” is using “variable” type loans as much as those who should not borrow. | FRIDAY DIGITAL

FP is surprised that the power couple who purchased a “billion-dollar condominium” is using “variable” type loans as much as those who should not borrow.

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Who’s buying!” …New condominiums in Tokyo exceed ¥100 million for the first time

The average price of new condominiums in Tokyo’s 23 wards exceeded ¥100 million in the first half of the year.” With “interest rates trending upward,” “Are you buying on the spur of the moment?” Are you borrowing without considering your situation?” “Have you done the calculations?” FPs are concerned.

On July 20, the Real Estate Economic Institute announced that the average price of newly built condominiums for sale in Tokyo’s23wards during January to June 2023 was 129.62million yen. This is approximately60% higher than the same period last year. In the first half of the year, the price exceeded ¥100 million for the first time since the survey began in 1973! Due to the average price, properties exceeding 200 million yen are not uncommon. The price range is becoming a price range that even power couples hesitate to consider.

In addition to rising land prices, construction costs, including materials, labor, and transportation costs, have remained high. There is no reason why condominium prices should not rise. When I consult with homebuyers about purchasing a home, I hear the simple and distressed voice, “Who’s buying!” I hear a simple and sad voice: “Who’s buying?

Compared to the same period last year, the price is about 60% higher! The average price of newly built condominiums for sale in the 23 wards of Tokyo from January to June 2023 was 129.62 million yen (PHOTO: AFLO)

Continuing from September…mortgage rates are also rising!

As home prices rise, financial plans are under review. Those who had planned to pay cash for a replacement are no exception. Will you increase your down payment or borrow more? Although we don’t want to do it, one option would be to give up the desired conditions and lower the price. What is troubling for borrowers is the rise in mortgage interest rates. This past October, major banks raised their mortgage rates for the second time since September.

For example, at Mizuho Bank, the base rate for a 10-year fixed rate was 3.55%, up 0.10 from the previous month. This is in line with the high March rate. The interest rate after the preferential treatment is 1.45%~, which is also at a high level. Among fixed-term loans, “Flat 35” showed a clear upward trend, with an interest rate of 1.88% (*), up 0.08% from the previous month, +0.20 from the beginning of the year, and +0.40 from the previous year.

However, only the mortgage rate known as “fixed” is rising. Floating rates have not changed. At Mizuho Bank, the base interest rate for the variable type is 2.475%, and the most favorable rate is 0.375%, unchanged since the beginning of the year. The mechanism behind this phenomenon, which is contrary to its name, is due to the difference in interest rates linked to different parties. Fixed mortgage rates are mainly linked to long-term interest rates, while floating mortgage rates are mainly linked to short-term interest rates.

This is the result of financial institutions reflecting the rise in long-term interest rates due to the Bank of Japan’s recent policy revisions in the fixed mortgage market. On the other hand, as the negative interest rate policy continues, financial institutions have left variable interest rates, which are linked to short-term interest rates, unchanged. Resona Bank lowered its variable interest rate in October, and competition for ultra-low interest rates continues. As a result, the gap between fixed and variable interest rates is widening.

Floating-rate type” accounts for 70% of mortgage users

According to JHF’s “Survey of Mortgage Loan Users (April 2023),” approximately 70% of users’ interest rate type is “floating-rate type,” 20% is “fixed-rate option type,” and 10% is “fixed for the entire term type. The survey covered people aged 20 to 70 nationwide who took out mortgage loans between October 2022 and March 2023. If the interest rate differential widens, a further shift to floating-rate loans is expected.

Floating interest rates will fluctuate. However, we do not know the “timing” of the change. It could be next month or five years from now. Thankfully, a 1% increase in interest rates in October does not mean a 1% increase in November’s repayment amount. Many variable-rate mortgages have a clause that fixes the repayment amount for five years, although the interest rate is reviewed every six months. Check your contract. Even if the repayment amount is fixed, you will still have to pay interest on any increase in interest rates during that period.

When you encounter a stylish, beautiful, and comfortable home, budget planning becomes lax. It is easy to make a repayment plan based on the conditions in front of you, saying, “I can pay it back now,” even with a high loan amount…

The more “you shouldn’t borrow a variable…

Even if mortgage interest rates rise, it does not mean loan bankruptcy if households can afford it. According to a recent JHF survey, 33.1% of “variable” borrowers said that they would continue to repay their loans when interest rates rise because they have the means to repay their loans and have enough funds to do so. The percentage of those who said they would pay off the entire amount if the interest rate burden increases was also 11%, which is excellent. The higher repayment amount will surely affect future funds, especially retirement funds. We would like to avoid a situation in which we find ourselves short of funds for retirement once the mortgage is paid off.

For users of the “fixed term option,” which is also classified as a variable mortgage, the highest response rate (29.1%) was “partial early repayment” as a response to an increase in repayment amount when interest rates rise. The difference between the two is interesting.

If households can afford it, they may choose the fixed-rate type from the beginning to avoid interest rate fluctuation risk. On the other hand, beware of “just-size repayment plans” in which the borrowing amount is too high, the fixed interest rate is too high, and the only way to reduce repayments is to choose a low variable interest rate anyway. If the repayment amount increases as interest rates rise, the family’s finances will immediately suffer. The more people who should not borrow a variable rate loan, the more they are forced to choose a variable interest rate, which is a distressing situation.

Budget planning that becomes lenient…Are you willing to take a risk at this point?

When people encounter a stylish, beautiful, and comfortable home, they tend to be lax in their budget planning. They tend to make repayment plans based on the conditions in front of them, saying, “I can pay back the loan now,” even if it is a large sum of money. When in the world are interest rates going to rise? Interest rates have never gone up in the past. We have become accustomed to ultra-low interest rates and deflation, and now we are in a phase of rising prices. There is no guarantee that variable mortgage rates will not rise. If the Bank of Japan modifies its policy regarding short-term interest rates, it will move quickly.

Mortgage repayments last for 20 or 30 years, and 50-year mortgages are on the rise. Will the power couple’s high income continue during that time? Will there be a temporary drop in income, a single income, or a decrease in income? The best is now, and I don’t want to think about the future. It is too expensive to turn a blind eye to various possibilities. We want to pick up the risk factors and consider how to deal with them. There is no need to take on reckless challenges. We want to keep in mind the contingency that group credit life insurance is not available.

Refinance” when interest rates rise! In fact, “refinance even if you wanted to.”

It is desirable for households that cannot absorb the increased repayment amount when interest rates rise to avoid the risk of rising interest rates. However, if the same amount is borrowed at a fixed interest rate, the difference in repayment amount is obvious. For example, if 40 million yen is borrowed at a variable interest rate of 0.375% with equal repayment of principal and interest over 35 years, the amount of repayment is 101,639 yen, and at a fixed interest rate of 1.88%, it is 130,055 yen. The annual difference is approximately 340,000 yen.

If the repayment amount is to be the same as the variable interest rate at a fixed interest rate of 1.88%, the borrowing amount will drop to 31.2 million yen. Would you add 8.8 million yen as a down payment, or lower your budget by giving up your desired residence or location? There is also a way to raise income and expenditures by reviewing the family budget. At a time of rising prices, operating a household budget is highly challenging. It would be reassuring if wage increases are expected, but will they be…?

And, as one variable mortgage user put it, “If it goes up, I’ll refinance. If prices rise, I will refinance.

What on earth are they refinancing for? Fixed interest rates are already on an upward trend. If variable interest rates rise, the level of fixed interest rates may be above the clouds. At the same time, the interest rate may become unaffordable unless you make early repayments to reduce the remaining balance. It is hard to refinance even if you want to. When changing financial institutions, fees are also required . With interest rates trending upward, refinancing strategies have already begun.

As a result of the Bank of Japan’s recent policy revision, financial institutions have reflected the “rise in long-term interest rates” in fixed-rate loans, and as a result, the gap between fixed- and variable-rate loans is widening.

The ironclad rule of thumb is to compare on a “total cost” basis…let’s do a simulation!

Floating-rate” is not necessarily bad. Fixed type” is not the absolute solution. If you want to take advantage of the low interest rates of floating-rate loans, you need to do some trial calculations and formulate a strategy. It goes without saying that you should include loan fees, guarantee fees, and other costs in your calculations. The rule of thumbis to make comparisons based on total cost.

The trial calculation should be based on the following questions: “What would the repayment amount be if the interest rate increased by 1%? What if interest rates rise by 2%? If you do this in several patterns, you can “visualize” the burden on the household budget. Once you know that you can handle a 1.5% increase in interest rates, you can rest assured that you will be fine.

The point is what comes next. The key point is what comes next. However, if the interest rate rises by 1.8% to 2.175%, household finances will become more difficult. The interest rate for “Flat 35,” which is +0.40% year-on-year, is currently 1.88%*. The refinancing target may be closer than expected.

If you estimate when interest rates rise and get the result that “repayment is difficult from a household perspective,” suspect that you are borrowing too much. Borrowing is debt, and over-borrowing opens the door to household bankruptcy.

*Most common interest rates offered by handling financial institutions when the loan rate is 90% or less and the loan term is between 21 and 35 years.

  • Interview and text by Izumi Oishi

    Certified Senior Financial Planner CFP®, Japan FP Association. Career consultant. After graduating from university, joined Recruit Co. Ltd. for about 15 years before establishing his own FP firm in 2001. He has been offering lectures and training courses on economic education, career design, and asset building to universities and companies, using familiar newspapers for men and women of all ages. For individuals, he provides objective financial planning and life and career planning. He was recognized by the Financial Services Agency and the Bank of Japan as a 2014 Financial Knowledge Dissemination Achiever for his work in promoting financial literacy.

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