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Housing loans: Nothing is 100 percent easy

by Philip Brasor and Masako Tsubuku

The government has yet to confirm the timing of the approved consumption tax increase from 5 to 8 percent. It’s slated to take place next April but there is still fear that the economy is too frail to withstand the effect the added tax might have on actual consumption. Consequently, the government is thinking of raising the ceiling for “Flat 35″ housing loans from 90 to 100 percent. That means borrowers who qualify can have the entire cost of a home financed.

Flat 35 loans are mortgages with fixed interest rates for up to 35 years. Most conventional bank loans only have fixed interest rates for the first 10 years, after which they become variable. Presumably, the screening process for the proposed 100-percent loan will be more stringent than it is now, as there is more risk involved, but the purpose of the change is to encourage people to buy homes, so it may not be as strict as you may think.

In the second quarter of this year, there were 28,000 applications for Flat 35 loans, a 3-percent increase over the same quarter last year. It’s assumed this boost is due to potential homeowners trying to beat the proposed consumption-tax increase as well as the higher interest rates and property prices that will materialize if and when Prime Minister Shinzo Abe’s mission to boost inflation succeeds. But history indicates that as soon as the tax increase kicks in, home sales will decrease, so the housing and real estate industries are pressuring the government for some sort of incentive.

If a person has a lot of money saved or a regular full-time job that is guaranteed for the rest of their life, borrowing money is a cinch, but such circumstances became less of a sure thing in Japan as the mid-’90s recession stretched into the new millennium. If there is no ceiling for the loan amount, people with less or no money saved — in other words, young people — may be encouraged to buy Flat 35 homes, since 100-percent financing means no money down. But it’s not quite that simple.

The Japan Housing Finance Agency is the guarantor for Flat 35 loans, but it’s still the financial institutions — whose money is being lent out — that have to approve them. Potential buyers can figure out how much a particular bank will lend them by visiting the institution’s website and filling out a dummy application with relevant financial and personal data, such as salary, age and size of family. However, until the person has a property they definitely want to buy and can show the bank, the terms and cost of the loan can never be determined.

What potential homeowners usually don’t realize is that it requires a certain amount of money to carry out the purchase of a house or condo even before a loan is approved and the funds are transferred into the borrower’s account. If buyers find property they like through a realtor they usually have to pay a type of deposit known as moshikomi-kin.

Typically ¥100,000, this deposit demonstrates the buyer’s seriousness. The realtor will reserve that property for the potential buyer for a set period of time, and if that person decides not to purchase the property, the money is returned. If the buyer does decides to take the property, the deposit goes toward the purchase payment. The deposit gives the realtor motivation to negotiate with the seller for better terms on behalf of the buyer, but its main benefit is that it gives the buyer room to look at other properties without forfeiting another and, more importantly, time to find out whether or not a bank will give them a loan.

Financial institutions have a two-step methodology for approving loans. The preliminary inspection is based on the application, which includes the potential borrower’s employment and financial particulars. This preliminary decision is usually made quickly, and in most cases if the borrower satisfies the criteria, the loan is eventually approved. But it isn’t certain that that will happen.

For Flat 35 loans, the type of house being bought is also important. Depending on how much the buyer wants to borrow, the house should be up to current safety (quake-proofing) and environmental (energy-efficient) standards. Once the preliminary inspection has been passed, buyers can sign the contract with the seller of the property or the developer. The problem at this point isn’t so much that the bank might turn down the loan application after the second, more thorough inspection (most housing contracts have an escape clause if the loan isn’t approved), but rather that money is usually needed to continue the purchase process, even though no funds have been lent out yet.

Banks don’t transfer the funds for Flat 35 mortgages until the house or condo is ready to be occupied. If the home is already built when the buyer signs the contract, this condition isn’t a big problem. But if the borrower is having a house built, or purchasing a condo that is still in the planning stage (which is often the case for new condos) then a down payment is usually needed for the builder or the developer before the home is completed. Traditionally, that means about 20 percent of the purchase price, half of which is paid when the contract is signed. Moreover, if the borrower is working through a real estate company, such companies usually demand a handling fee, normally 3 percent of the price of the property, before the buyer moves in.

So even if a borrower is approved for a Flat 35 loan with 100-percent financing, if the seller demands money down or the realtor demands a fee when the contract is signed, the borrower still has to come up with that cash. There are some financial institutions that lend money when a contract is signed, even if the home is not built yet, but the interest rate is higher and the borrower would have to make payments on the loan right away, before moving into the property. If the property isn’t ready and the buyer is still renting, this places a heavy burden on everyday finances.

There is also a special loan called a tsunagi-yushi that provides funds for down payments and other related expenses before a Flat 35 loan goes into effect. Banks that offer these may demand a guarantor, and they will definitely charge a handling fee. The interest rate for tsunagi-yushi, while less than for regular bank loans, is higher than a normal housing loan because it is short term and for smaller amounts of money. This is one of the reasons banks do not automatically oppose the 100 percent financing proposal for Flat-35 loans — they can make extra money from them. In addition, conventional bank loans often come with life insurance so that the balance of a mortgage is covered if the borrower dies before the loan is paid off, but for Flat 35 loans life insurance is optional.

These terms can be just as much of an obstacle to buying a home as higher interest rates or tax increases, but they are rarely discussed. We recently talked to a builder who is developing a 152-plot subdivision in northern Chiba Prefecture, from which potential buyers can select a lot and order a house. The salesman told us that after a contract is signed, a house would take eight months to complete. The average price for the homes, with land (170 sq. meters), is ¥30 million. We asked if the company demanded a down payment at the time of the contract signing, and he said it was negotiable. “Maybe as little as ¥200,000 for the land and ¥200,000 for the house,” he said, trying to make it sound as simple and cheap as possible. The company understands what it’s up against.

Next month Home Truths looks into the actual steps required to secure a loan — and alternative loans and major banks for those who don’t qualify for a Flat 35.

Philip Brasor and Masako Tsubuku blog about Japanese housing at www.catforehead.wordpress.com.

  • Mike Wyckoff

    I’ve been living in Japan for 15 years and had so much trouble getting a mortgage, it was almost too much trouble for what its worth. In Japan, house values rarely go up, because from what I’ve heard (source: Japanese carpenters) the house isnt built to last more than 50 years.

  • Austin

    Hi, does anybody know how difficult it is for a non-resident to get a loan for an apartment in Japan? My wife is Japanese (so filling out paperwork etc would be no issue) but we live in the UK and are looking into the possibility of buying a property to let out in Tokyo. Any comments appreciated