Expert Mortgage Strategies for Rising Interest Rates

Long-term interest rates are at their highest level in 13 years and 9 months raising concerns about mortgage loans

Long-term interest rates are rising. The yield on newly issued 10-year government bonds, a key indicator, reached 1.25% in mid-January, marking the highest level in 13 years and 9 months.

The long era of deflation and ultra-low interest rates has ended, and we are now entering a period of rising inflation and interest rates. One concern is mortgage loans. There is anxiety that rising interest rates will cause repayment amounts to grow.

“Customers who are worried about interest rates rising have been consulting whether they should make early repayments on their mortgage loans,” 

Says Teruhiro Yagi, the representative of the comprehensive financial planning office Ever Side (Shinjuku, Tokyo).

“For some people, it’s a huge concern, but mortgage loans are favored debt, so it’s probably not necessary to repay them right away.” (Yagi)

He advises that for variable-rate mortgage loans, even if interest rates rise somewhat, the repayment amount won’t increase dramatically for about five years.

What about the decision to make early repayments? 1% mortgage interest < 4%+ U.S. Treasury bond returns

By the way, what does it mean that a mortgage loan is favored debt?

The customer who consulted about making an early repayment had taken out a mortgage loan with a variable interest rate in the range of zero to a few percent from an online bank, and was considering making an early repayment of around 10 million yen of that loan.

Yagi-san calculated and showed the difference between the 1% mortgage interest and, for example, the return on U.S. Treasury bonds at 4% or more. In other words, it is far more beneficial to use the 10 million yen that can be repaid early for investment rather than hastily repaying a super-low-interest loan.

There are other factors, but the difference in interest rates, such as with U.S. Treasury bonds, is one key point in deciding whether early repayment should be prioritized.

“This difference is the key point, and excluding currency risk, the spread is now more than 3% annually.” (Yagi)

On the other hand, if the interest rate difference is for example, within 1%, then early repayment is worth considering.

Furthermore, as for the favored debt of a mortgage, there is the Group Credit Life Insurance (danshin) that borrowers are often forced to join when taking out the loan. If the borrower becomes unable to repay due to illness or death, the insurance company underwriting the group credit life insurance pays off the loan in full. The remaining family members can continue to live in the house.

In most cases, the insurance premiums for Group Credit Life Insurance are only slightly added to the loan interest rate. The advantage is that you can get significant coverage with low premiums.

There is a comparison site called Moge Check that ranks mortgage loan interest rates, incorporating the unique benefits of group credit life insurance for each financial institution.

For example, a certain online bank offers a mortgage loan interest rate of 0.3%, which rises to 0.35% when factoring in Group Credit Life Insurance. Yagi-san says, “Considering Group Credit Life Insurance, the interest rate is still low and it’s an important point to pay attention to.”

Domestic long-term interest rates are feeling like they will exceed 1.5% (expert) ⇒ Definitely entering a rising interest rate phase

That said, domestic long-term interest rates are rising. Regarding this situation, Masahiro Ichikawa, Chief Market Strategist at Sumitomo Mitsui DS Asset Management, explains:

“It is being pulled up by the high level of U.S. long-term interest rates. The U.S. Federal Reserve’s rate cuts have been delayed with the emergence of Trump. Unlike the U.S., Japan is heading in the direction of raising interest rates.”

He explains.

The U.S. economy has experienced inflation, and the central bank has repeatedly raised interest rates, but with inflation slowing down, they have begun lowering rates. With Trump’s victory in last fall’s U.S. presidential election, he has prioritized U.S.-centric policies. He advocates imposing high tariffs on imported goods to protect domestic industries, which has raised concerns about inflation.

On the other hand, Japan has shifted from a deflationary economy to an inflationary one, with wage increases also progressing. The Bank of Japan has shifted from ultra-low interest rate policies to focusing on raising rates, and it is exploring further rate hikes. The policy interest rate that the Bank of Japan adjusts in the financial market, the unsecured overnight call rate, is currently targeted at about 0.25%.

Regarding the Bank of Japan’s monetary policy and future domestic interest rates, Ichikawa says: