The vexing “mortgage” question…fixed? Floating? Or a mix? How will “rising long-term interest rates” change things?

Variable-rate mortgages have undetermined cash flow despite long-term debt…

Long-term interest rates are rising. The Bank of Japan has been pursuing a policy of ultra-low interest rates, but this fall it changed its stance to allow rates to exceed 1%. Since the repayment amount of a mortgage loan is greatly influenced by interest rate trends, what is the best option, whether the interest rate is fixed, variable, or a mix of the two?

“Real estate properties have become more expensive recently, and a used condominium in the city center can be purchased for 70 to 80 million yen. A used condominium in the city center costs about 70-80 million yen. A used condominium in the city center costs about 70 to 80 million yen. Even if your annual household income is around 10 million yen, it will be tough. Even if your household income is around 10 million yen, it may be difficult to afford.

On the other hand, if you take out a mortgage, the repayment period is longer, such as 35 years. years, and the amount of repayment varies greatly depending on the interest rate. You have to choose a mortgage based on the interest rate.

Mitsuko Arita, a financial planner, says, “The interest rate on a variable-rate mortgage is very low, but the cash flow is not solid. She advises on home purchases, mortgages, and other money matters. Mortgages come in two types: fixed interest rates and variable interest rates, which are subject to market interest rate trends, and a combination of the two.

The issues involved in taking out a mortgage are all unfamiliar, such as the economy and interest rate levels 10 or 20 years in the future, as well as one’s own income and family situation.

Even experts who look at the economy and interest rate trends say , “With a variable-rate mortgage, interest payments may increase in the future, and you need to think about preparing for this now” (Masahiro Ichikawa, Chief Market Strategist, Sumitomo Mitsui DS Asset Management). Mr. Ichikawa also discusses the impact of mortgages on household finances as follows.

The cash flow (flow of money) is not solid even though it is a long-term debt. It is frightening when you think about it calmly.

With the possibility of interest rates rising, a mortgage with a variable interest rate makes it difficult to predict how much the interest payments will increase, exposing the borrower to interest rate risk.

■Mortgage Interest Rate Forms

Currently, variable interest rates are by far the most economical…

What types of mortgages are there, and how much difference does the interest rate level make in the amount of repayment? The level of interest rates paid on mortgages varies considerably depending on the amount borrowed, term, down payment, and other conditions, as well as on the financial institution offering the loan.

For example, let’s look at a case where 40 million yen is borrowed and repaid over 30 years. If the interest rate is fixed for the entire term, there are products that offer a surface interest rate of 1.6%, excluding other expenses, and a simple calculation shows that the total repayment amount would be approximately 4,963,000 yen and the monthly repayment amount would be approximately 164,000 yen.

On the other hand, variable interest rates are currently attractive due to their low interest rates. If the interest rate is the same for the entire term, the total repayment amount would be approximately 4,102,000 yen and the monthly repayment amount would be approximately 117,000 yen. If interest rates continue to rise and the average interest rate for the entire term is 3.0%, the total repayment amount would be approximately 5.805 million yen and the average monthly repayment amount would be approximately 211,000 yen.

What are the recent interest rates? The yield on 10-year JGBs, which is considered an indicator of long-term interest rates, rose to 0.955% at the end of October. The BOJ has been pursuing a “zero interest rate” monetary policy that has led to ultra-low interest rates, but since Kazuo Ueda took office as BOJ governor in April, the BOJ has gradually begun to modify its stance as if it would allow interest rates to rise.

For the time being, 2% is the upper limit. However, looking ahead to the next 5 or 10 years, it is likely that the long-term interest rate will rise as well.

Mr. Ichikawa says, “We have been forcibly keeping interest rates low, but if prices and wages rise, long-term interest rates are likely to rise as well. For the time being, the question is what kind of wage increase will be shown by management in next year’s Spring Struggle on the centralized response date in mid-March.

A “negative interest rate” has been introduced, whereby financial institutions are charged a negative 0.1% interest rate on certain deposits they make with the Bank of Japan. The BOJ is expressing its intention to financial institutions to direct their lending rather than paying interest on their deposits with the BOJ. Mr. Ichikawa believes that the BOJ may lift the negative interest rate if the Spring Struggle shows a certain amount of wage increase, and that long-term interest rates “may even exceed 1%.

On the other hand, Mr. Ichikawa also says, “Long-term interest rates will soon reach 2%.

I don’t think we will see long-term interest rates soar to 2% anytime soon. A rise in short- and long-term interest rates in a short period of time would be confusing. Interest rates will be set in line with the global economy and the supply-demand balance for government bonds, in other words, the way they should be, but it will take a long time. It will take a long time, but the BOJ will slowly take the helm toward monetary normalization.

For the time being, the possibility of a sharp rise in interest rates may be small. On the other hand, looking ahead five or ten years, rising prices and wages are expected to normalize the BOJ’s monetary policy, which is keeping interest rates at low levels. At that time, depending on the state of economic activity, interest rates may rise further, and it would not be surprising if interest rates in Japan, like those in other countries, are several percentage points higher.

With a “mixed loan” of fixed + variable interest rates, can the “variable” portion be prepaid…

Many of the cases that come to Mr. Arita for mortgage consultation are couples who are both working. In such cases, there is a “pair loan” method in which each of the couple takes out a loan. For example, one couple could borrow at a fixed rate and the other at a variable rate, or the total amount borrowed could be spread across the couple. Even if only one borrower takes out a “mixed loan,” the loan should be divided into fixed and variable interest rate portions, so that when interest rates rise, the variable interest rate portion can be prepaid first. At that time, refinancing the portion of the loan to be prepaid to a loan with terms that suit you is also an option.

For example, “If you take out a loan at a fixed interest rate plus or minus a certain level of interest rate, and if your education expenses increase significantly after 10 years, you may be able to refinance your loan. “If you take out a loan at a fixed rate plus or minus interest, for example, and education expenses increase significantly in 10 years, or if your salary drops in your 50s, you can refinance the loan at a fixed rate. “If you take out a loan at a fixed rate plus or minus interest, for example, if your education expenses increase significantly in 10 years or if your salary decreases in your 50s, consider whether you can repay the loan. If interest rates rise, you should consider whether you can prepay the variable interest rate portion of the loan.

Mr. Arita continued. When a couple takes out a pair loan, for example, what will happen to their income if the wife, who has been working full time, takes maternity leave for childbirth, works shorter hours for childcare, or even changes from full-time to part-time work? The system and response of the employer may differ, so it is important to carefully examine and consider what will happen to the wife’s income beforehand, he says.

■Housing Loan Borrowing Types (Single Loan and Pair Loan)

Somehow” is not a good idea. First, we want to understand each other’s assets and plans for the future.

Some of the couples who come to Mr. Arita for advice do not discuss their assets and future plans with each other in advance. Some couples do not know each other’s annual income, and some do not know how much each of them earn. In addition, some husbands think that their wives will always work as full-time employees, while their wives were hoping to eventually become part-time workers.

Mr. Arita said, “Sometimes couples don’t discuss things together. Many people don’t discuss important things such as income or the amount of savings,” he says.

When interest rates are rising, a mortgage with a variable interest rate can bankrupt households that cannot afford to make early repayments, which is difficult. Fixed and variable interest rates have different advantages and disadvantages for different people. It is important to simulate in advance how you will act when interest rates rise.