Fixed rate mortgages getting more popular

[TokyoBoglehead]

Bump because this topic is getting some discussion on the other thread about early repayments.

You could look at in terms of pure risk premium.

The lower variable rate comes with "higher risk" therefore better return.

However, considering the entire weight of Japanese Financial Government is centered around keeping rates low, it think it is a pretty damn safe bet.

I gather I am very much a fringe skeptic in this area.

I fixed my mortgage from the outset when I started mid last decade, and don’t regret it. My monthly costs are higher with my fixed 1.0% rate mortgage than they would be with a variable rate one, but they are fixed, and from that point on, it hasn’t demanded any thought whatsoever.

Versus then, and now, I would be even more inclined to go with a fixed loan now, if involving a large principal, over a long duration. Decades is a long time over which to hope that interest rates remain favourably low, on a large principal, albeit decreasing over time with monthly repayments.

So yes Japan’s public finances also would benefit from low rates. But I don’t know that that actually guarantees that rates will remain low for the next few decades?

Rather, I think the policy makers are getting towards the end of the current can-kicking, what with the BOJ printing money to vacuum up the annual fiscal deficit, the yen faring poorly this year (temporary? or has the camel’s back been broken?), yet the government turns around and spends 3 trillion bucks to buy yen, causing lots of volatility that it claimed the intervention was to clamp down on. It doesn’t make sense to me. Japan is bringing the depreciation of the yen upon itself, so why not just stop that? Oh yes, because of the debt…

It’s a stick situation for them, and I as a compete layman anticipate the policy makers will make some kind of change, before long. I am thinking weeks and months here, not years. At the least the BOJ governor will change per schedule at worst, and I doubt the new person will be an exact Kuroda clone. But something has gotta change, or the voters are going to get as angry as the passive Japanese voters can, with a depreciating yen bringing that much desired inflation to these shores. Maybe they stick with this, and it’s a lower currency / lower purchasing lower that Japan residents needs to face. If so then yes at least low interest rates will keep mortgage repayments manageable, but other cost of living will go up…

What is going on overseas with interest rates also makes me think it increasingly unlikely that Japan will remain immune.

So there’s the fringe thinking of a happily fixed mortgage borrower for you

I think paying for peace of mind is valid. Life is not a series of probability equations. If my wife said she would feel better a. Fixing rates b. Paying off early, etc I would definitely weigh that just as heavily as the cold hard math.

[sutebayashi]

So, it’s not like I can’t do cold hard math, at least I ran the simulations in my excel sheet

The key thing for me is that I have no clue what will happen over the lengthen duration of a mortgage, but at least to me it doesn’t seem at all inconceivable that interest rates could rise to levels that the current generation is unaccustomed to. I assign a non-zero probability of a nasty interest rate rise during the life of my mortgage.

I think the fundamental difficulty is quantifying the risk. Deal with the risk later if it eventuates is one approach, take the risk out of play immediately is another, and there is a middle ground too.

If there is a formula that shows me that I should switch from fixed 1.0% to variable that would be interesting, but I suspect there doesn’t exist such a thing because the exact scenario to play out is unknown at this time. Ignoring the risk because it is unknown / unquantifiable is not an approach I feel comfortable with, but that is not a math question.

[zeroshiki]

For mortgages in Japan, there's the 5 year rule and the 125% rule. Even if your interest rate changes, the amount you pay monthly does not change for 5 years. After the 5th year, it can change but only at a max of 125% of what you were already paying. This doesn't change the interest you're paying, it just locks in the amount. So its conceivable that you're left only paying down interest at some point because of the rate increases but these rules guarantee that you won't be left poor with sudden increases and gives you some leeway to figure out how to move forward.

https://www.shinseibank.com/retail/hous ... vol72.html

[sutebayashi]

Thanks! Right, I remember hearing something about this when I was considering which to go for.
I found myself jumping to section 5 未払利息の怖さ of this link.
At least this method helps one to buy some more time if required, I guess.

[mighty58]

Let's not forget inflation as well. A long-term fixed-rate mortgage is one of the best inflation hedges an individual can make.

For me, given the levels that interest rates and inflation have been at over the last decade in Japan, it doesn't seem too far-fetched that they would move up, rather than down, over the next 30-35 years. But I'm no economist, and even if I was, my guess is as good as yours.

[Tkydon]

You can get a Flat 35 for 35 Years @ 1.48%...

https://www.aeonbank.co.jp/housing_loan/

[jcc]

I got a floating mortgage not too long ago.

I'm happy with it, but I can pay most of the sum off if the interest were to go up sharply, and my monthly payment is very low(I moved further from the center as I'm able to work remotely these days)

I also don't believe it will. A huge chunk of the japanese economy is in the construction industry and it depends on the low interest rates to sell at current prices. If interest rates went up, people would stop buying or prices would have to come down, and current owners would be very unhappy. I'm pretty confident that rising interests are more or less the very final resort they will take after every single other option has been exhausted.

[Tkydon]

Just one thing to remember...

If you get a Fixed Rate Mortgage, obviously the rate will not go up for the duration of the Fix, but,

The fixed rate is higher than the variable rate, and the longer the Fixed Duration, the higher the rate.

You will be paying a higher rate of interest when the Outstanding Balance of the Loan on which the interest is calculated is highest...

[sutebayashi]

Indeed, the primary feature of a fixed rate mortgage is that the rate won't go up.

But that the the fixed rate is higher than the variable rate at the time the loan commences is a known fact, and not a guarantee for the duration of the loan, hence the motivation for fixing.

You will be paying a higher rate of interest when the Outstanding Balance of the Loan on which the interest is calculated is highest...

Yes, but as a practical matter I don't care about that, because going for fixed, fixes the monthly repayment amount. The internals of the monthly repayment amount are just a detail.

In my case, I refinanced my initial mortgage to 1% fixed when Kuroda gave me the chance, and I considered this "high" rate to be great deal considering I still had decades of repayment schedule ahead of me on a large loan, and that I don't regard the possibility of market rates rising as an inconceivable risk.

If anything, recently
- Kuroda has been getting asked a lot of questions about his policies
- the recent UK budget debacle (and the relative competence of Japanese policy makers)
make me think the chances of market rate rises in Japan are somewhat underestimated! I absolutely hope that this risk doesn't eventuate though because indeed I imagine it could be nasty for many borrowers in Japan.