Key Factors That Distinguish Wealth from Poverty Amid Rising Interest Rates

Variable-rate mortgages: Those who have borrowed from online banks should be cautious!

The Bank of Japan decided to raise interest rates at its monetary policy meeting, increasing the policy rate by 0.15% to 0.25% starting August 1. This change comes about four months after the negative interest rate policy was lifted in March. Japan has now moved from a state of nearly zero interest rates (0-0.1%) to an era of positive interest rates for the first time in 16 years.

As a result of the rate hike, interest rates on deposits and savings will rise. Immediately after the Bank of Japan’s decision to raise rates, major banks announced significant increases in their savings account interest rates. Sumitomo Mitsui Banking Corporation will raise its ordinary savings rate from 0.02% to 0.10% starting August 6, while Mitsubishi UFJ Bank and Mizuho Bank will apply the new rate from September 2.

For those in the working-age population, concerns often center around interest rates on mortgages and education loans.

 

In the case of mortgages, there are generally two types of interest rates: fixed rates, which remain constant, and variable rates, which are reviewed every six months. With the recent rate hike, the focus is on variable rates, which are used by 70-80% of mortgage holders.

 

Variable rates are often linked to the “short-term prime rate” (hereafter referred to as “short-term prime”), which is based on the Bank of Japan’s policy rate. Many financial institutions set their own benchmark rate for mortgage interest, typically adding around 1% to the short-term prime rate. Essentially, when the Bank of Japan raises the policy rate, the short-term prime rate increases, leading to a rise in variable rates as well.

 

In response to the recent rate hike by the Bank of Japan, Mitsubishi UFJ Bank, Sumitomo Mitsui Banking Corporation, and Mizuho Bank, the three major banks, have announced they will increase the short-term prime rate from 1.475% to 1.625%. Other financial institutions are expected to follow suit. With the rise in the short-term prime rate, an increase in variable rates seems inevitable.

 

Financial planner Kenji Matsuoka explains:

 

“Major banks and regional banks have kept the short-term prime rate at 1.475% since January 2009, for about 15 and a half years. With the policy rate rising from 0.1% to 0.25%, other financial institutions are likely to follow the major banks and raise the short-term prime rate by 0.15%. The benchmark rate for variable rates is expected to rise by 0.15% as a result.”

 

However, not all banks link their variable rates to the short-term prime rate..

 

“Sumishin SBI Net Bank, Rakuten Bank, and AEON Bank all increased their benchmark variable interest rates following the March lifting of the negative interest rate policy. Among these, only Sumishin SBI Net Bank’s variable rates are linked to the short-term prime rate, while Rakuten Bank and AEON Bank base their benchmark rates on market interest rates.

 

Additionally, Sony Bank raised its benchmark variable rate from August, independent of the Bank of Japan’s rate hike. Sony Bank, like Rakuten Bank and others, appears to adjust its benchmark rate according to market interest rate trends.”

 

Given the recent additional rate hike by the Bank of Japan, there is a possibility that these online banks might increase their variable rates again.