Key Factors That Distinguish Wealth from Poverty Amid Rising Interest Rates

Floating rate “mortgages”…be careful if you are borrowing from an online bank!

The Bank of Japan decided to raise interest rates at its monetary policy meeting, raising the policy rate by 0.15% to 0.25% per year from the first of this month, about four months after the lifting of negative interest rates in March. Japan is now in an “interest-rate era” for the first time in 16 years, having moved away from a “near-interest-free” policy rate range of 0 to 0.1%.

The interest rate hike will raise interest rates on savings accounts. Immediately after the BOJ decided to raise interest rates additionally, major banks announced one after another that they would raise interest rates on savings accounts fivefold. Sumitomo Mitsui Banking Corporation raised its savings deposit interest rate from 0.02% to 0.10% per year starting on September 6, while Mitsubishi UFJ Bank and Mizuho Bank will apply the rate from September 2.

For the working-age population, however, interest rates on mortgages and education loans are likely to be a concern.

For housing loans, there are two main interest rate types: fixed interest rates, which have a fixed rate, and variable interest rates, which are reviewed every six months. The interest rate hike will focus attention on variable interest rates, which are used by 70 to 80% of mortgage borrowers.

In many cases, floating interest rates are linked to the “short-term prime rate” (hereafter “Short-Price Plaza”), which is determined based on the Bank of Japan’s policy rate. Many financial institutions set their own base interest rate, which is the “fixed price” of the mortgage rate, by adding about 1% to the Short-Price Rate. Basically, when the BOJ raises its policy rate, the Short-Term Loan Program rate rises, and the floating rate linked to it also rises.

Following the BOJ’s rate hike, three megabanks, Mitsubishi UFJ Bank, Sumitomo Mitsui Banking Corporation, and Mizuho Bank, announced that they would raise their T-Bills from 1.475% to 1.625% per year. Other financial institutions are expected to follow suit. The increase in the Short-Term Loan Program will inevitably lead to a rise in variable interest rates.

Kenji Matsuoka, a financial planner, explains.

Megabanks and regional bankshave kept the Short-Term Loan Rate unchanged at 1.475% per year for about 15 and a half years since January 2009. Now that the policy rate has been raised from 0.1% to 0.25%, other financial institutions are expected to raise their T-bills by 0.15%, just as the megabanks did. With this rate hike, it is safe to assume that the base interest rate for variable rates will go up by 0.15%.”

However, not all banks have linked their variable interest rates to the Short Plans.

Three banks, SBI Sumishin Net Bank, Rakuten Bank, and AEON Bank, raised their base rates for variable interest rates following the lifting of negative interest rates in March. Of these banks, only SBI Sumishin Net Bank links its variable interest rate to the short plat, while Rakuten Bank and AEON Bank link their base rates to market interest rates.

In addition, Sony Bank raised the base interest rate for its variable interest rate in August, regardless of the BOJ’s interest rate hike. Sony Bank, like Rakuten Bank, seems to determine its base interest rate based on market interest rate movements.

What are the chances that those online banks will raise their floating interest rates again after the Bank of Japan’s additional interest rate hike?

SBI Sumishin NetBank has announced that it will raise its short pledge rate by another 0.15% starting in October.

Net banks have been setting their base interest rates just below the profitability line, so I think they will move to raise them even with this rate hike. Considering the cost of funding from the short-term money market, net banks are more susceptible to the BOJ’s interest rate hike than megabanks, and I think they will be forced to raise their floating interest rates.

I hear that the number of people taking out mortgages at net banks has been increasing over the past couple of years. Perhaps those who have mortgages at variable rates at online banks may be greatly affected by this rate hike.”

In 18 months, the policy rate will be at 1%!　Worst-case scenario is “stagflation”.

After the Monetary Policy Meeting on March 31, BOJ Governor Kazuo Ueda stated at a press conference. If the inflation rate continues to move in line with the forecast, “we will continue to raise the policy rate and adjust the degree of monetary easing accordingly,” he said.

One week after Ueda’s press conference, BOJ Deputy Governor Shinichi Uchida said in a speech in Hakodate, Hokkaido, on March 7, “We will not raise interest rates under unstable conditions in financial and capital markets,” indicating his cautious stance toward additional rate hikes. However, he also stated that “there is no difference in thinking between him and the governor,” and market participants seem to think that “once the market calms down, he will probably take the lead in raising interest rates.

In the short-term financial market, we are expecting another rate hike within the year by 20-30%, ” he said.

But the main scenariois a0.25% hike to 0.5% by March or April ’25 at the latest, andanother hike to 0.75% in September or October ’25. Furthermore,I have the impression that more and more financial market experts see a rise to 1 percent percent around the end of March ’26, ” he said.

If the policy rate rises to 1 percent, households already borrowing at low variable rates will see their repayments increase significantly. Mr. Matsuoka is concerned about whether households will be able to withstand the variable interest rate when the policy rate rises to 1%.

Until now, the base interest rate for variable interest rates has generally been 2.475%, and the applicable interest rate has been around 0.3-0.5%. The applicable interest rate is the actual interest rate borne by the borrower, which is the base rate minus the preferential rate. If the policy rate rises to 1%, the applicable interest rate will be well over 1%.

If the applicable interest rate is 0.3-0.5%, the amount returned through the mortgage tax reduction, in which 0.7% of the loan balance is deducted from income tax, is more than the interest payment. But if the policy rate is 1%, the interest payment on the mortgage will exceed the deduction for the loan tax credit.

Those who have loans at the very edge of their loan limits would probably not be able to refinance to a fixed rate.”

That being the case, I am concerned about the scenario that will unfold once the policy interest rate rises to 1%.

If the policy rate stays at 1%, there is a possibility that the Japanese economy will go into recession.

The worst-case scenario is that even if the policy rate rises to 1%, inflation will not stop, the recession will worsen, and the economy will fall into stagflation. With interest rates neither lowered nor raised, the economy will get worse and worse, and prices will only go up. If that happens, it is no wonder that many people will not be able to pay their mortgages.”

The “elderly” with financial assets become wealthy. The “working-age” population will be richer due to loan repayments and increased Social Security. ……

For now, I think the market participants see the policy rate going up to 1% by the end of March ’26 and then towards 2%, although I’m not sure how long that will be. 2% is looking more and more realistic, so people with 30-year mortgages should keep that in mind. I think the market participants are thinking that 2% will be heading toward 2%.

Those who took out a loan with an online bank will have a hard time paying it back if the interest rate goes up, especially since the interest rate was so low when they took out the loan. You may need to be more prepared.”

Current homeowners with mortgages should take steps to protect themselves against the risk of future interest rate hikes.

It is important not to spend the money returned from the mortgage tax cut or the monthly surplus, but to put it into savings in preparation for future prepayments or increases in variable interest rates.

I recommend individual JGBs. JGBs for individuals are reviewed every three months and the interest rate goes up by the amount of the interest rate increase.

It is better not to invest in NISA, etc. It is said that you will surely make money if you continue to invest for about five years, but there is no guarantee that this will be the case. I think it would be wiser to gradually increase the interest rate with JGBs for individuals and use the money for early repayment.

The days when mortgage borrowers with variable interest rates could take advantage of low interest rates are ending.

In times of interest rates, interest rates on deposits rise and financial assets increase. This works to the advantage of the elderly who have finished paying off their loans and have deposits and other financial assets.

On the other hand, the working-age population will suffer more and more financially because “mortgage repayments are going up and the burden of social security is increasing.

According to the Ministry of Finance, the national burden rate (tax burden rate + social security burden rate) in FY 2012 is 45.1% (estimate). In 1999, when the zero-interest-rate policy was first implemented, the national burden rate was 35.4%, and in 2004, when the negative interest-rate policy began, it was 42.7%. It should be obvious at a glance that the burden is increasing.

Now, social networking sites are filled with voices such as “Social insurance premiums for the working-age population should be reduced,” and “Get on with the policy of lowering social insurance premiums.

Last fiscal year, the government’s tax revenues totaled more than 72 trillion yen, reaching a record high for the fourth consecutive year. Even so, social security costs will rise.

If tax revenues are rising, the usual policy would be to lower the consumption tax and social security payments. However, the Kishida cabinet has made a tea party out of it with a flat tax cut of ¥40,000.

The dream of owning a home is now a distant dream due to rising mortgage interest rates, and the burden of social security is so heavy that wages have risen but living expenses are still a meager ……. This is not the way to increase the marriage rate in Japan, nor to eliminate the declining birthrate.

Kenji Matsuoka After working as a money writer, financial planner, and market analyst for a securities company, he became independent in 1996. Writes articles on finance and asset management mainly for business and economic magazines. Author of “Textbook for the First Year of Robo-Advisor Investing” and “Understanding with Rich Illustrations! Cashless Payments: The Book You Can Definitely Benefit from”.