People with Variable Interest Rate Loans in Trouble as Old Financial Thinking No Longer Applies

The Benefits Are for Financial Institutions

Of course, there is also the disadvantage that if variable interest rates rise, you will end up losing.

“What’s concerning is how the economy will fare if the Bank of Japan aggressively continues raising rates. There are quite a few market participants who think Japan will fall into a recession.

If the expectation of a recession strengthens, short-term interest rates will remain high while long-term interest rates start to fall. This will create an inverted yield curve where long-term rates are lower than short-term rates. Looking at past examples, this is quite a possible scenario.

After an inverted yield curve occurs, a reduction in the policy interest rate is generally anticipated, and variable interest rates will also fall accordingly. Therefore, refinancing to a fixed rate may not be a good strategy.

In fact, in the US, an inverted yield curve has persisted for about two years. It briefly resolved at the beginning of August but has returned to an inverted state.”

So, one might wonder if people in the US with variable interest rate home loans are facing a greater burden in interest payments compared to those who chose fixed rates.

“In the US, about 90% have fixed rates. It is only Japan where there are many users of variable interest rates.

By the way, variable interest rate loans are products where financial institutions do not take on the risk. In other words, the borrower takes the risk. With fixed interest rates, financial institutions also take on the risk. For example, ‘Flat 35’ is a loan where the repayment amount remains constant for up to 35 years, and the financial institution absorbs all the risk regardless of how much interest rates rise in the future.

Despite this, the proportion of variable interest rate loans has increased so much in Japan because ultra-low interest rates persisted for a long time, and the view that interest rates will not rise in the future became mainstream without people noticing.

However, interest rates can both rise and fall, and variable interest rates carry significant risk. I think it is only now that this risk is beginning to become apparent.”

The “world of interest rates” is likely to affect the choice between variable and fixed interest rate home loans.

 

“Reduce Risk Rather than Increase Assets!” What’s Needed in an Era of Interest Rates is a “Defensive Stance”.

What about the positive effects of rising interest rates on household finances? Since the Bank of Japan’s rate hike, interest rates on savings and deposits have started to increase.

“If the policy interest rate rises to 1% in the future, there is a significant possibility of a strong yen, which would negatively impact the Japanese economy. In a situation where the future of the economy is uncertain, it might be wiser to focus on protecting assets rather than increasing them.

As a defensive measure to protect assets, I believe individual government bonds are the best option.”

Individual government bonds, which promise “no loss of principal,” include fixed interest types such as “fixed 5 years” and “fixed 3 years,” as well as a variable interest type called “variable 10 years.” Matsuoka recommends the 10-year maturity “variable 10 years.”