The big mistake of saying that “Flat 35” is the same everywhere… A single choice of bank can cause a loss of millions of yen.

If you don’t know, you will lose… It wasn’t “the same no matter where you borrow”!

12 On March 19, the Bank of Japan decided to raise interest rates additionally. Amidst the tremors in the mortgage market, the number of users of the fixed-rate “Flat 35” is increasing rapidly in order to avoid the risk of interest rate hikes. But don’t be hasty. Are you thinking that “Flat 35 is the same regardless of which lender you borrow from”?　In fact, the choice of financial institution can make a big difference in the amount of repayment, screening conditions, and coverage in the event of an emergency.

It should also be noted that the interest rate applicable to Flat 35 is not the rate at the time of application, but the rate at the time the loan is actually executed (the month the loan is executed, which is generally the date of delivery).

Why you can be approved even if you have just changed jobs

Flat 35 is a fixed-rate mortgage loan with a maximum term of 35 years, provided through a partnership between the Japan Housing Finance Agency (JHF) and private financial institutions. Let’s start with a basic description of Flat 35.

Interest rates and repayment amounts are fixed at the time of borrowing.

Flat 35 makes it easy to make a repayment plan because the borrowing interest rate and repayment amount are fixed at the time of borrowing until the end of repayment.

Interest rates are higher than those of variable-rate mortgages.

Flat 35 has no interest rate fluctuation risk, but the interest rate at the time of borrowing is higher than that of variable-rate mortgages.

On the other hand, the interest rate of Flat 35 is lower than that of long-term fixed-rate mortgages from private financial institutions because JHF assumes the lending risk (risk of not being able to collect the loan).

◇Screening criteria are unique

Flat 35 is a mortgage loan designed to encourage the acquisition of high-quality housing, and the screening process focuses on “property (housing performance). In order to use Flat 35, the subject house must conform to the technical standards set by the Japan Housing Finance Agency (JHF), and a property inspection and a certificate of conformity must be obtained.

On the other hand, the screening criteria related to “persons” such as income, occupation, and health status are more permissive than those for mortgages from private financial institutions. For example, the following people can apply for and may be able to use Flat 35.

• Those who have been employed for less than one year… can apply with one month’s pay stubs.
• Those on maternity/paternity leave… Can apply independently even while on leave, regardless of whether they have returned to work, and can apply using their annual income from the previous year or their monthly salary after returning to work (or before taking leave), whichever is higher.
• Those who are stationed overseas: Can apply while working overseas or immediately after returning to work in Japan.
• Pension only income… Can apply if there is continuity of income from only pension.
• People who cannot take out group credit life insurance (Danshin) for health reasons… Because Danshin is “not mandatory”, people who cannot take out Danshin due to pre-existing conditions, medical history, etc. can also use the service (some “guaranteed” Flat 35 products require Danshin membership).

Interest rates are reduced when conditions are met.

Flat 35 has a system whereby interest rates can be reduced by up to 1% per year for a certain period from the date of borrowing if conditions such as the user’s family structure (households with children or young couples) and housing performance are met.

How “interest rates” change even for the same Flat 35

There are two types of Flat 35: “purchase-type” and “guaranteed-type.

While interest rates and loan fees for “purchase-type” loans vary by financial institution, other product features are the same at all financial institutions.

On the other hand, “Guarantee Type” has certain restrictions, but financial institutions can design their own products, so there is a tendency for differences among financial institutions. The number of financial institutions offering “guaranteed” Flat 35 is limited, and as of December 2013, only the following eight financial institutions are accepting new applications.

• The following eight financial institutions are newly accepting applications for Flat 35 “Guaranteed Type” as of December 2013.
• SBI Alhi
• SBI Aruhi, DOCOMO Finance, Inc.
• Family Life Service Co.
• Zaikyo Housing Finance Co.
• SBI Sumishin Net Bank
• Japan Mortgage Services
• Japan Mortgage Services, Inc.
• Credit Saison

0.The weight of “800,000 yen” created by a 1% difference in interest rates

Depending on which financial institution you choose to borrow a Flat 35, there may be a difference in four items: “borrowing interest rate,” “loan fees,” “group credit life insurance (Danshin),” and “total repayment burden ratio (repayment ratio).

1_Borrowing interest rate

The borrowing interest rate is a factor that directly affects the repayment amount; even a 0.1% difference in interest rate can make a difference of several hundred thousand yen in the total repayment amount, depending on the amount borrowed and the term of the loan.

For example, when borrowing 10 million yen and repaying in 35 years, if the borrowing interest rate is 0.1% higher per year, the total repayment amount will increase by approximately 215,000 yen. If the borrowed amount is 40 million yen, the difference is approximately 860,000 yen.

Do not compare only by “commission rate.

2_Loan Fees

Loan fees are fees paid to financial institutions when using Flat 35. Since each financial institution determines the amount of loan fees, even if other conditions are the same, there can be a difference of several hundred thousand yen depending on the financial institution used.

There are two types of loan fee payment methods: a fixed percentage of the loan amount (fixed-rate type) and a fixed amount regardless of the loan amount (fixed-amount type).

In the case of the fixed-rate type, the borrower pays an upfront fee (fixed amount) at the time of borrowing, plus the interest rate on the loan. Therefore, when comparing the fees for “fixed-rate” loans, the increase in the repayment amount due to the added interest rate must be included in the comparison. The larger the loan amount and the longer the loan term, the larger the increase in repayment amount.

In the case of fixed-rate loans, if the borrowing amount is the same at 40 million yen, there is a 440,000 yen difference in fees between institutions with a fee rate of 1.1% (including tax) and those with a fee rate of 2.2% (including tax).

In the case of “fixed-rate” loans, the comparison should include the increase in repayment amount due to the addition of interest on top of the fixed-rate portion.

As an example, let us compare two products, A (fixed-rate portion of 55,000 yen with an annual 0.1% interest rate increase) and B (fixed-rate portion of 55,000 yen with an annual 0.2% interest rate increase).

Assuming the loan amount is 40 million yen and the loan term is 35 years, the loan fee is approximately 921,000 yen for A and 1,787,000 yen for B. Although the fixed amount is the same, the total cost including the interest rate surcharge is approximately 866,000 yen higher for B.

3_Group credit life insurance (Danshin)

In the case of “guaranteed” Flat 35, group credit life insurance (danshin) is a product offered by the financial institution handling the loan, so the coverage varies depending on the financial institution used. Depending on the coverage, the borrowing interest rate may be added or a separate rider (insurance premium) may be required, which may affect the repayment amount.

Some financial institutions and product plans require that you enroll in group credit, and if you cannot enroll in group credit for health reasons or other reasons, you will not be able to use this type of loan.

In the case of Flat 35, which is a “purchase-type” loan, group credit is optional, and the product is the “New Group Credit” or “New Group Credit with Three Major Diseases” offered by the Japan Housing Finance Agency (JHF). Therefore, there is no difference among financial institutions.

4_Total Repayment Burden Ratio (Repayment Ratio)

The total repayment ratio is the ratio of the total annual repayment amount of Flat 35 and other loans to annual income. If the total repayment burden ratio is not below the standard, Flat 35 cannot be used.

In the case of “purchase-type” Flat 35, there is no difference in the total repayment burden ratio requirements among financial institutions, with those with annual incomes of less than 4 million yen required to have a total repayment burden ratio of less than 30%, and those with annual incomes of 4 million yen or more required to have a total repayment burden ratio of less than 35%.

In the case of “guaranteed” Flat 35, some financial institutions set the condition of use at a total repayment ratio of 20% or less in cases where the loan-to-value ratio (= ratio of Flat 35 loan amount to the construction or purchase price of the house) exceeds 80% (less than 20% personal funds), making the conditions more stringent than for the purchase-type loans.

For example, a borrower with an annual income of 5 million yen who has no other debts can borrow up to approximately 45.4 million yen if the interest rate is 1.8% per year and the loan term is 35 years, and the total repayment burden ratio is 35% or less. On the other hand, if the total repayment ratio is 20% or less, the borrowing amount is reduced to approximately 26 million yen.

DOCOMO, SBI, Aruch… Complete comparison of “interest rates and group credit” of 8 companies handling 《Guaranteed Type》.

What kind of difference arises depending on which financial institution you choose to borrow a Flat 35? Here, we will compare all “guaranteed” Flat 35 products handled by eight financial institutions and “purchase-type” Flat 35 products handled by major financial institutions to confirm the differences.

Comparison of “Guaranteed Type” and “Purchase Type” Flat 35 products handled by major financial institutions Comparison of 《Guaranteed Type》 Flat 35

As of December 2013, the following table shows the borrowing interest rate, loan fees, group credit life insurance (group credit life insurance), total repayment burden ratio (repayment ratio), and characteristics of each of the “guaranteed” Flat 35 products offered by eight financial institutions.

The lowest borrowing rate for “guaranteed” Flat 35 is offered by “DOCOMO Finance. The applicable interest rate as of December 2013 is 1.720% per year for loan-to-value ratios of over 70% and under 90%, and down to 1.670% per year for loan-to-value ratios of 50% and under.

Why are there banks with interest rates “over 4.5%”? Market outlook for “purchase-type” loans and the differences in strategies among financial institutions.

Comparison of “Flat 35” and “Flat 35 with purchase type Comparison of “purchase-type” Flat 35

The product characteristics of “purchase-type” Flat 35 are the same at all financial institutions, but the “borrowing interest rate” and “loan fees” differ among financial institutions. If other conditions are the same, choosing a financial institution with a lower borrowing rate and lower financing fees will reduce the burden on the borrower.

As of December 2013, Flat 35 “purchase-type” borrowing rates range from 1.970% to 4.510% per year, depending on the financial institution (for loan terms of 21 to 35 years and loan-to-value ratios of 90% or less). The most common interest rate is 1.970% per year, which is at the lower end of the range. For financial institutions that use a fixed loan fee, the market rate is 0.1% to 0.2% per year above this level.

The highest interest rate is 4.510% per year at Sumitomo Mitsui Banking Corporation. SMBC’s ultra-long-term fixed-rate mortgages (loan terms of 20 to 35 years) range from 3.33% to 4.23% per annum, suggesting that the bank is trying to induce borrowers to buy mortgages from its own bank. Among megabanks, Mitsubishi UFJ Bank and Mizuho Bank have stopped offering Flat 35, and Sumitomo Mitsui Banking Corporation may do so in the future.

Loan fees range from 1% to 2% of the loan amount for the fixed-rate type, and tens of thousands of yen for the fixed-rate type. For the fixed-rate type, the borrower’s interest rate is often added at 0.1% to 0.2% per annum. Some financial institutions offer preferential loan fees if certain conditions are met, such as designating one’s own bank account as the repayment account. It is important to check for such preferential fees.

The difference in total repayment amount is “about 10 million yen”…FP recommends the final conclusion of “variable vs. fixed” during the interest rate rise phase.

With Flat 35, the borrowing interest rate and repayment amount are fixed at the time of borrowing until repayment is completed. The fact that there is no concern that interest rates will rise during repayment and the repayment amount will be higher than expected is “peace of mind. However, as a compensation, the interest rate at the time of borrowing is higher than that of a variable-rate mortgage. It is important to understand that in order to avoid the risk of interest rates rising in the future, a certain amount of interest (the difference between variable and fixed interest rates) will be “surely” borne by the borrower.

As an example, let’s compare the total repayment amount for a 35-year loan of 40 million yen. Assuming that interest rates remain constant throughout the repayment period, the total repayment amount would be approximately 45.34 million yen with a variable-rate mortgage (0.730% per year) and approximately 55.39 million yen with Flat 35 (1.970% per year, no reduction in interest rate), a difference of approximately 10 million yen.

This is a case that assumes that interest rates do not fluctuate, and if interest rates rise during repayment, the difference will narrow, and there is a “possibility” that the total repayment amount will reverse. On the other hand, Flat 35, which requires a higher interest rate at the beginning of the loan period when the loan balance is the highest, will slow down the pace of principal repayment.

One way to prepare for the risk of rising interest rates is to fix the interest rate, but another effective measure is to borrow at the lowest possible interest rate to “reduce the principal (outstanding loan balance) as quickly as possible. Even if interest rates rise, the impact on the repayment amount will be smaller if the principal is reduced. If the borrower has sufficient financial means, it is possible to reduce the principal amount by making early repayments, thereby limiting to some extent the increase in repayment amount caused by rising interest rates.

Flat 35 is suitable for those who have difficulty coping with an increase in the repayment amount in the middle of the term, or those who feel stressed by fluctuating interest rates and repayment amounts. On the other hand, variable-rate mortgages are suitable for those who are financially comfortable and can control their repayments.

It is important not to think only of Flat 35, but rather to compare variable-rate mortgages as well, and choose the mortgage that best suits your needs.

The information in this article is based on information as of December 2013. When considering the use of Flat 35, please confirm the latest information on the websites of the financial institutions that offer them.