How-tos | HOME TRUTHS

Low interest rates cause spike in refinancing

by Philip Brasor and Masako Tsubuku

It has been more than a month since the Bank of Japan introduced negative interest rates in its bid to revitalize the economy. For consumers, the rate change is a mixed blessing. Obviously, interest on deposits will not go up any time soon, but anyone thinking of buying a house or condominium can get cheaper loans.

According to the Real Estate Economic Institute, the average price of a condominium in Japan in 2015 was ¥46.18 million, which is 7.2 percent higher than it was in 2014. Over the past three years, spurred by material and labor shortages, the price of condos has increased by almost 20 percent, the steepest rise ever. In the Tokyo metropolitan area, realtors think that a 70 percent monthly rate for contract signings is acceptable, but in January the rate was only 58.6 percent. The Asahi Shimbun recently reported that one “large condominium complex” in Saitama has been on sale for over a year with apartments priced in the ¥40-¥50 million range, and there are still a lot of units unsold, despite the fact that prices have been reduced by about 10 percent. According to a salesperson, house hunters right now are “very tight with money.”

They may be waiting for prices to come down. Experts say that when looking for new homes people should ideally limit themselves to properties priced at five to six times the buyer’s annual income, and since the average yearly income of a Japanese worker in 2014 was ¥4.5 million, an average condo price of ¥46 million could be considered out of reach. In addition, the tax exemption for gifts from parents for home purchases was recently reduced from ¥7 million to ¥3 million, though the government is talking about increasing the exemption to ¥25 million if and when the consumption tax goes up to 10 percent. Anyone who is not in a hurry may feel it’s better to wait.

For those who don’t want to wait and are concerned mainly about mortgages, it’s as good a time as any to buy. Government-guaranteed Flat 35 loans are now down to an average of 1.25 percent for mortgages of 21 to 35 years. The rate was 1.37 percent in February. Some banks, such as Mitsui Sumitomo, are reducing their Flat 35 rates to even less than 1 percent. Though it sounds as if banks aren’t going to make any money this way, the low rates are usually fixed for 10 years, after which they become variable and, invariably, go up.

The competition for customers can be intense. Shinsei Bank told Mainichi Shimbun that in the month after the negative rate went into effect, it received six times as many loan inquiries as it did during the month before. Home buyers should take everything into consideration, including the length of the initial loan term and, most significantly, the cost of refinancing once the initial term is over. The Asahi presented the example of a 40-year-old salaryman who bought a house in Yokohama 10 years ago. The balance on his loan is ¥32 million, and now that his fixed-rate period is up he wants to refinance his mortgage to take advantage of a variable interest rate of 0.56 percent. He found that, in the long run, he would save ¥4.5 million, realized as a ¥10,000 a month repayment savings, but only if the rate stays the same. Variable rates are always low to begin with and can go up sharply later.

The Nihon Keizai Shimbun has reported that the number of applications for refinancing increased by 2½ times from January to February. Refinancing is the real benefit of lower interest rates, and anyone who can refinance their loan should. The economic magazine Diamond-Zai recommends that new home buyers get the longest initial fixed-term rate they can find. Ten years ago, fixed mortgages were around 3 percent. Now they’re about 1.1 percent, but some mega-banks offer fixed rates for less than 1 percent. Variable rates are always lower to begin with, now at around 0.5 percent.

Diamond-Zai says home buyers should beware of several factors when hunting for loans. In addition to avoiding the temptation of variable interest, it recommends asking around if you qualify for a Flat 35 loan because the difference in rates can be as much as 0.5 percentage points. Also, try to keep the overall loan term as short as possible. As the name implies, Flat 35 mortgages can be as long as 35 years, but the shorter they are, the less you pay in the end. This is especially important for older borrowers, since they may still be paying off their mortgage after they retire. Also, don’t sign up for a bonus-style repayment system, where your monthly payments are less because you pay hefty lump sums twice a year during bonus time. Companies are not required by law to pay bonuses, so if yours isn’t as high as you expect you could have trouble paying a large semiannual bill.

Most important, ask about refinancing conditions and fees, which vary greatly from one bank to another. Some banks’ refinancing fees are so high they cancel out the savings you get with the lower interest rates. Diamond-Zai recommends that you refinance if, after your initial rate period is finished, you have more than 10 years left on your mortgage, the balance is more than ¥10 million and the difference between the old rate and the new rate is at least 1 percentage point. It’s OK to change banks, since other institutions will likely give you better rates and terms to get your business.

Diamond-Zai gives an example to show how refinancing works. A 45-year-old homeowner’s 10-year, fixed-rate 2.2 percent loan for ¥30 million is finished, with ¥23.6 million left on his 35-year mortgage. He changes to a fixed rate of 1.39 percent. His monthly payments drop from ¥107,000 to ¥93,000. In the end he saves ¥4.17 million in interest but pays ¥620,000 in refinancing fees, so his overall savings are ¥3.55 million.

But if the same person also changes the remaining term of the loan from 25 to 21 years, he could save ¥4.9 million in interest, though his monthly payments go up to ¥108,000. After subtracting the ¥580,000 refinancing fee, he ends up saving ¥4.32 million, considerably higher than if he kept the full 35-year period. Like any purchase, it pays to shop around for refinancing deals.

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

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