<h3><b>Variable-rate mortgages: Those who have borrowed from online banks should be cautious!</b></h3>
<p><span style="font-weight: 400;">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.</span></p>
<p><span style="font-weight: 400;">As a result of the rate hike, interest rates on deposits and savings will rise. Immediately after the Bank of Japan&#8217;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.</span></p>
<figure id="attachment_386426" class="wp-caption alignnone" style="width: 2088px;" aria-describedby="caption-attachment-386426"><a href="#" data-ident_hash="157a03c1"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2024/08/2aae0d321e514c10d3ecb298bcc6f050.jpg" alt=""></a><figcaption id="caption-attachment-386426" class="wp-caption-text"><span style="font-weight: 400;">What will happen to interest rates in the future? (PHOTO: Afro)</span></figcaption></figure>
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<p><span style="font-weight: 400;">For those in the working-age population, concerns often center around interest rates on mortgages and education loans.</span></p>
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<p><span style="font-weight: 400;">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.</span></p>
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<p><span style="font-weight: 400;">Variable rates are often linked to the &#8220;short-term prime rate&#8221; (hereafter referred to as &#8220;short-term prime&#8221;), which is based on the Bank of Japan&#8217;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.</span></p>
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<p><span style="font-weight: 400;">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.</span></p>
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<p><span style="font-weight: 400;">Financial planner Kenji Matsuoka explains:</span></p>
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<p><b>“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.”</b></p>
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<p><span style="font-weight: 400;">However, not all banks link their variable rates to the short-term prime rate..</span></p>
<p><span style="font-weight: 400;"> </span></p>
<p><b>&#8220;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&#8217;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.</b></p>
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<p><b>Additionally, Sony Bank raised its benchmark variable rate from August, independent of the Bank of Japan&#8217;s rate hike. Sony Bank, like Rakuten Bank and others, appears to adjust its benchmark rate according to market interest rate trends.&#8221;</b></p>
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<p><span style="font-weight: 400;">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. </span></p>
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<p><b>&#8220;Sumishin SBI Net Bank has announced that it will raise the short-term prime rate by an additional 0.15% starting in October.</b></p>
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<p><b>Online banks have set their benchmark rates close to the breakeven point, so they are likely to increase rates in response to this hike. Considering the cost of funding from the short-term financial markets, online banks are more sensitive to the Bank of Japan&#8217;s rate changes than major banks and may have no choice but to raise their variable rates.</b></p>
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<p><b>In the past two or three years, more people have been taking out mortgages with online banks. Therefore, those with variable-rate mortgages from online banks might be significantly affected by this rate hike.”</b></p>
<figure id="attachment_386427" class="wp-caption alignnone" style="width: 2603px;" aria-describedby="caption-attachment-386427"><a href="#" data-ident_hash="b882009e"><img src="https://res.cloudinary.com/fridaydigital/image/private/t_article_image/wpmedia/2024/08/787fc5284eb237cb7b70449926a9bb83.jpg" alt=""></a><figcaption id="caption-attachment-386427" class="wp-caption-text"><span style="font-weight: 400;">During the March lift of the negative interest rate policy, major banks did not adjust their rates. However, this time, the three megabanks have announced they will raise the short-term prime rate, which serves as a benchmark for mortgage rates, from 1.475% to 1.625%. There is also a possibility of an increase in variable rates. </span></figcaption></figure>
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<h3><b>After a year and a half, the policy rate might reach 1%! The worst-case scenario is stagflation.</b></h3>
<p><span style="font-weight: 400;">After the Bank of Japan&#8217;s monetary policy meeting on July 31, Governor Kazuo Ueda stated in a press conference that if inflation rates follow the projections, the policy interest rate would be raised accordingly, and the degree of monetary easing would be adjusted.</span></p>
<p><span style="font-weight: 400;">One week later, on August 7, Deputy Governor Shinichi Uchida spoke in Hakodate, Hokkaido, and indicated a cautious stance on additional rate hikes, saying, &#8220;We will not raise interest rates in the current unstable financial market.&#8221; However, he also mentioned that there are no differences in views between him and the Governor, and market participants believe that if the market stabilizes, the Bank of Japan may shift towards rate hikes.</span></p>
<p><b>&#8220;In the short-term financial market, there is a 20-30% chance of an additional rate hike within this year.</b></p>
<p><b>However, the main scenario is to raise the rate by 0.25% to 0.5% by March or, at the latest, April 2025. Another rate hike to 0.75% is expected by September or October 2025. Additionally, there is an increasing impression among financial market experts that the rate could rise to 1% by the end of March 2026.”</b></p>
<p><span style="font-weight: 400;">If the policy interest rate rises to 1%, households with existing low variable-rate loans will experience a significant increase in their repayment amounts. Matsuoka expresses concern about whether households can withstand the higher variable rates when the policy rate reaches 1%.</span></p>
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<p><b>&#8220;Until now, the base rate for variable loans has been around 2.475%, with the applicable rate approximately 0.3-0.5%. The applicable rate is the actual burden rate after subtracting the preferential margin from the base rate. If the policy interest rate increases to 1%, the applicable rate will significantly exceed 1%.</b></p>
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<p><b>With an applicable rate of 0.3-0.5%, the amount returned from the housing loan tax deduction exceeds the interest payments. However, if the policy rate reaches 1%, the interest payments on housing loans will exceed the tax deduction benefits.</b></p>
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<p><b>Those who have taken loans up to their limits are unlikely to be able to switch to fixed-rate loans.” </b></p>
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<p><span style="font-weight: 400;">Given this situation, concerns about the scenario following a 1% policy interest rate arise.</span></p>
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<p><b>&#8220;If the rate remains at 1%, there is a possibility that the Japanese economy could enter a recession. </b></p>
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<p><b>The worst-case scenario would be if inflation does not subside even with a 1% policy rate, leading to a deepening recession and stagflation. In such a state, where neither lowering nor raising interest rates is possible, the economy could worsen while prices continue to rise. In this case, it wouldn’t be surprising if many people are unable to manage their loan payments.” </b></p>
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<h3><b>Older individuals with financial assets are affluent, while the working-age population faces challenges due to loan repayments and increasing social security costs.</b></h3>
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<p><b>&#8220;As of now, it is expected that the policy interest rate will rise to 1% by the end of March 2026. Although it&#8217;s unclear how long it will take to reach 2%, market participants believe it will move in that direction. With the 2% rate becoming more realistic, those who have taken out a 30-year mortgage should keep this in mind.</b></p>
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<p><b>Those who have taken out loans with online banks, in particular, may face increased repayment difficulties as interest rates rise, given that their initial rates were low. It might be wise to be prepared for this.”</b></p>
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<p><span style="font-weight: 400;">For those in the working-age group with mortgages, it is advisable to take precautionary measures to avoid future interest rate risks. </span></p>
<p><b>&#8220;It is important to save any money returned from the housing loan tax deduction and any monthly surplus rather than using it. This will help you prepare for future early repayments and potential increases in variable interest rates.</b></p>
<p><b>I recommend individual government bonds. These bonds are reviewed every three months, and the interest rate increases with the rise in rates.</b></p>
<p><b>Investments like NISA should be avoided. While they are often presented as guaranteed to be profitable if held for about five years, there is no such guarantee. Gradually increasing savings with individual government bonds and using them for early repayments is a wiser strategy.”</b></p>
<p><span style="font-weight: 400;">The era when homeowners with variable-rate mortgages could benefit from low interest rates is coming to an end.</span></p>
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<p><span style="font-weight: 400;">In times of rising interest rates, deposit rates also increase, benefiting older individuals who have completed their loan repayments and hold financial assets.</span></p>
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<p><span style="font-weight: 400;">Conversely, the working-age population faces increasing economic pressure due to rising mortgage payments and growing social security burdens.</span></p>
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<p><span style="font-weight: 400;">According to the Ministry of Finance, the national burden rate (tax burden rate + social security burden rate) for fiscal year 2024 is estimated to be 45.1%. This is up from 35.4% in 1999, when the zero interest rate policy was first implemented, and 42.7% in 2016, when the negative interest rate policy began. It is clear that the burden is increasing.</span></p>
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<p><span style="font-weight: 400;">Currently, social media is abuzz with calls to reduce social insurance premiums for the working-age population and to implement policies to lower these costs quickly.</span></p>
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<p><span style="font-weight: 400;">Last year&#8217;s national tax revenue was over 72 trillion yen, setting a record for the fourth consecutive year. Despite this, social security costs continue to rise.</span></p>
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<p><b>&#8220;If tax revenue is increasing, a typical policy would be to lower consumption tax or social security costs. However, the Kishida administration has merely offered a fixed tax reduction of 40,000 yen.&#8221;</b></p>
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<p><span style="font-weight: 400;">With rising mortgage rates making the dream of homeownership more distant and heavy social security burdens increasing living costs despite wage increases, it is unlikely that Japan will see improvements in marriage rates or a resolution to its declining birthrate. </span></p>
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<p><span style="font-weight: 400;">Kenji Matsuoka is a money writer and financial planner. After working as a market analyst at a securities firm, he became independent in 1996. He writes articles on finance and asset management for business and economic magazines. His books include “The Textbook for the First Year of Robo-Advisor Investment” and “Understanding Cashless Payments with Abundant Illustrations: The Book That Will Definitely Save You Money.”</span></p>


 Sayuri Saito

 It has been about four months since the lifting of negative interest rates in March. Japan is now in the "interest-rate era" for the first time in 16 years, having escaped from the "almost interest-free" situation. For the working-age population, interest rates on "home loans" and "education loans" are a concern.

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