<h3><span class="strongInContent">Variable-rate mortgages have undetermined cash flow despite long-term debt&#8230;</span></h3>
<p> 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?</p>
<p><span class="strongInContent"> &#8220;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.</span><span class="strongInContent"> A used condominium in the city center costs about 70-80 million yen.</span><span class="strongInContent"> 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.</span><span class="strongInContent"> Even if your household income is around 10 million yen, it may be difficult to afford.</span><span class="strongInContent"> </span></p>
<p><span class="strongInContent"> On the other hand, if you take out a mortgage, the repayment period is longer, such as 35 years.</span><span class="strongInContent"> years, and the amount of repayment varies greatly depending on the interest rate. You have to choose a mortgage based on the interest rate.</span><span class="strongInContent"> </span></p>
<figure id="attachment_345120" aria-describedby="caption-attachment-345120" style="width: 640px" class="wp-caption alignnone"><a href="#" data-ident_hash="b944cc0f"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/11/d98c4e502a470c61df9f8c59f7dc7223.jpg" alt=""></a><figcaption id="caption-attachment-345120" class="wp-caption-text"> A variable-rate mortgage is a long-term obligation, but the cash flow (flow of money) is not fixed. It is frightening when you think about it calmly,&#8221; says the expert.</figcaption></figure>
<p> Mitsuko Arita, a financial planner, says, &#8220;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.</p>
<div data-friday-ad-slot="AD_inArticle"></div>
<p> 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&#8217;s own income and family situation.</p>
<p> Even experts who look at the economy and interest rate trends say <span class="strongInContent">, &#8220;With a variable-rate mortgage, interest payments may increase in the future, and you need to think about preparing for this now&#8221;</span> (Masahiro Ichikawa, Chief Market Strategist, Sumitomo Mitsui DS Asset Management). Mr. Ichikawa also discusses the impact of mortgages on household finances as follows.</p>
<p><span class="strongInContent"> 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.</span></p>
<p> 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.</p>
<div class="expapp-no-provided-scope expapp-no-provided-scope-start"></div>
<h4><span class="strongInContent"> ■Mortgage Interest Rate Forms</span></h4>
<figure id="attachment_345121" aria-describedby="caption-attachment-345121" style="width: 1348px" class="wp-caption alignnone"><a href="#" data-ident_hash="ecee9067"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/11/ee7a552129694880a7591c321124dc84.jpg" alt=""></a><figcaption id="caption-attachment-345121" class="wp-caption-text"> 60% of respondents currently using a mortgage loan had a variable interest rate (from Sumitomo Mitsui Trust Asset&#8217;s Mirai Research Institute&#8217;s &#8220;Survey on Awareness and Actual Conditions Concerning Housing and Asset Formation (2023),&#8221; an independent questionnaire survey of 10,000 people (aged 20-69)).</figcaption></figure>
<div class="expapp-no-provided-scope expapp-no-provided-scope-end"></div>
<h3><span class="strongInContent"> Currently, variable interest rates are by far the most economical&#8230;</span></h3>
<p> 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.</p>
<p> For example, let&#8217;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.</p>
<p> 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.</p>
<div data-friday-ad-slot="AD_inArticle"></div>
<p> 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 &#8220;zero interest rate&#8221; 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.</p>
<div data-friday-nextpage-lead=" For the time being, 2% is the upper limit....................."></div>
<div class="expapp-yahoo-paragraph-break"></div>
<h3><span class="strongInContent">For the time being, 2% is the upper limit.</span><span class="strongInContent"> However, looking ahead to the next 5 or 10 years, it is likely that the long-term interest rate will rise as well.</span></h3>
<p> Mr. Ichikawa says, <span class="strongInContent">&#8220;We have been forcibly keeping interest rates low, but if prices and wages rise, long-term interest rates are likely to rise as well</span>. For the time being, the question is what kind of wage increase will be shown by management in next year&#8217;s Spring Struggle on the centralized response date in mid-March.</p>
<p> A &#8220;negative interest rate&#8221; 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 &#8220;may even exceed 1%.</p>
<div data-friday-ad-slot="AD_inArticle"></div>
<p> On the other hand, Mr. Ichikawa also says, &#8220;Long-term interest rates will soon reach 2%.</p>
<p><span class="strongInContent"> I don&#8217;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.</span><span class="strongInContent"> </span></p>
<p> 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&#8217;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.</p>
<figure id="attachment_345122" aria-describedby="caption-attachment-345122" style="width: 5453px" class="wp-caption alignnone"><a href="#" data-ident_hash="5602bd08"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/11/c03c1fe0077b8e3af68d9ec68868cc5c.jpg" alt=""></a><figcaption id="caption-attachment-345122" class="wp-caption-text"> The experts believe that, although interest rates have been forcibly kept low until now, if prices and wages rise, long-term interest rates are likely to rise as well. What we should pay attention to in the near term is next year&#8217;s spring labor unions (PHOTO: AFRO)</figcaption></figure>
<h3><span class="strongInContent"> With a &#8220;mixed loan&#8221; of fixed + variable interest rates, can the &#8220;variable&#8221; portion be prepaid&#8230;</span></h3>
<p> Many of the cases that come to Mr. Arita for mortgage consultation are couples who are both working. In such cases, there is a &#8220;pair loan&#8221; 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 &#8220;mixed loan,&#8221; 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.</p>
<p><span class="strongInContent"> For example, &#8220;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.</span><span class="strongInContent"> &#8220;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.</span><span class="strongInContent"> &#8220;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.</span></p>
<p> 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&#8217;s income beforehand, he says.</p>
<div class="expapp-no-provided-scope expapp-no-provided-scope-start"></div>
<h4><span class="strongInContent"> ■Housing Loan Borrowing Types (Single Loan and Pair Loan)</span></h4>
<figure id="attachment_345123" aria-describedby="caption-attachment-345123" style="width: 1349px" class="wp-caption alignnone"><a href="#" data-ident_hash="4a8429c9"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2023/11/de78afb6612b604ac79a93a8264a6736.jpg" alt=""></a><figcaption id="caption-attachment-345123" class="wp-caption-text"> About 20% of those in their 20s and 30s use pair loans (based on an independent survey of 10,000 people aged 20-69 conducted by Sumitomo Mitsui Trust Asset Mirai Research Institute, &#8220;Survey on Awareness and Actual Conditions Concerning Housing and Asset Formation (2023)&#8221;).</figcaption></figure>
<div class="expapp-no-provided-scope expapp-no-provided-scope-end"></div>
<h3><span class="strongInContent"> Somehow&#8221; is not a good idea.</span><span class="strongInContent"> First, we want to understand each other&#8217;s assets and plans for the future.</span></h3>
<p> 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&#8217;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.</p>
<div data-friday-ad-slot="AD_inArticle"></div>
<p> Mr. Arita <span class="strongInContent">said, &#8220;Sometimes couples don&#8217;t discuss things together. Many people don&#8217;t discuss important things such as income or the amount of savings,&#8221;</span> he says.</p>
<p> 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.</p>


 Hideki Asai

 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%. What is the best option for mortgage rates, which are largely influenced by interest rate trends, fixed, variable, or a mix?

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

Access Ranking