Mortgage -- Continue with Variable or Switch to Fixed rate

[sakuramelodymusic]

Hello !

My husband and I have been debating back and forth about our mortgage recently these days with the interest rates going up in Japan, should we continue with our variable/ floating interest rate which is currently at 0.725% -- with 21 years left to pay off our mortgage which owing now is around 9.5 million yen or should we consider switching to another bank and getting a 20 year fixed rate of 2.1%. ? or is there another option we should be considering ?

I have heard through the grapevine from some of my clients who work in the financial district that they believe it will take around 5 years for the variable rate to reach 2.0% and another 5 years for it to reach 4.5-5% floating rate ( meaning the fixed rate could be somewhere around 6-7% 10 years from now similar to North American mortgage rates ) -- do you believe this as well ?

Really feeling confused about what we should do -- as there is definitely risk in waiting with the variable , where as there is a risk of jumping on the fixed rate too soon as well .

[RetireJapan]

Hello !

My husband and I have been debating back and forth about our mortgage recently these days with the interest rates going up in Japan, should we continue with our variable/ floating interest rate which is currently at 0.725% -- with 21 years left to pay off our mortgage which owing now is around 9.5 million yen or should we consider switching to another bank and getting a 20 year fixed rate of 2.1%. ? or is there another option we should be considering ?

I have heard through the grapevine from some of my clients who work in the financial district that they believe it will take around 5 years for the variable rate to reach 2.0% and another 5 years for it to reach 4.5-5% floating rate ( meaning the fixed rate could be somewhere around 6-7% 10 years from now similar to North American mortgage rates ) -- do you believe this as well ?

Really feeling confused about what we should do -- as there is definitely risk in waiting with the variable , where as there is a risk of jumping on the fixed rate too soon as well .

Welcome! This is a very personal decision to make. A lot will depend on your ability to pay, what you think will happen, etc.

I find it very hard to believe that mortgage rates will end up anywhere near 2%, let alone 5%

The vast majority of mortgages are floating rate in Japan currently, and that would put a lot of the population in the red. Can't see it being politically feasible.

Having said that, if you are worried and can afford to pay 2% fixed, it may be worth if for your peace of mind.

My mortgage is floating at 0.5% and has yet to change since I got it about ten years ago.

[captainspoke]

...
I have heard through the grapevine from some of my clients who work in the financial district that they believe it will take around 5 years for the variable rate to reach 2.0% and another 5 years for it to reach 4.5-5% floating rate ( meaning the fixed rate could be somewhere around 6-7% 10 years from now similar to North American mortgage rates ) -- do you believe this as well ?
...

I don't believe this at all.

maybe what they were saying was "it will take a minimum of around 5 years and an act of god for the variable rate to reach 2.0%, and a minimum of another 5 years and another equally unlikely act of god for it to reach 4.5-5% floating rate"...?

Tho the US economy is strong, so rate cuts are off the table this year (maybe one?), absolutely nobody is forecasting further hikes (which might pressure the BOJ to raise). 2025 will see some minor US rate cuts, which will relieve a little pressure here.

The world apart from the US is not doing so well, economically. Euroland is sagging, japan the same, china is dealing with its problems, and so on.

Japan raising rates in two years to 2%, and in 5 years to 5% would assume a hugely hot (almost uncontrollably hot) japanese economy. That forecast just isn't in the cards--nobody, absolutely nobody, is forecasting that.

Japan's rates were last at "somewhere around 6-7%" in about 1989, which I happen to be aware of, since that's when we got our mortgage (long since paid off).

That was at the end of the big, (multi-) decade-long bubble economy. And like, do you see a similar bubble happening now, or a few years from now, where the BOJ will have to raise rates that high?

Nope, I didn't think so.

Keep your variable rate mortgage.

[sakuramelodymusic]

Thank-you for your responses -- you are echoing my thoughts on the matter as well -- I do hope that nothing crazy happens over the next 3-5 years -- but hopefully with your responses my husband will consider my advice which was to wait and monitor the situation and stick with the variable until we even see a small rise in our rate and then reassess --- our situation at that time. I would like to avoid jumping into a fixed rate due to fear of the possible interest hikes in the future. Though it seems like a double edge sword you could get hurt either way if things do hike up.

According to what I have been reading in the news -- the BOJ did it`s first variable rate mortgage hike this June 2024 -- for the first time in 17 years . -- and that the burden on variable interest rates borrowers will not immediately see an increase due to the 5 year rule ( which I am still trying to get my head around lol) -- but I wonder when we will actually see an increase even of 0.1% for us having a smaller loan this won't effect us too badly though --
this is an example of just one article I`ve read recently -- https://english.kyodonews.net/news/2024 ... -rate.html

my husband has also never seen an increase in his interest rate since getting the mortgage ( although I did encourage him to negotiate a reduction -- it used to be higher actually ) so the 0.725% is the renegotiated lower rate from 3 years ago

my husbands banks mortgage interest rate plans that they posted for June 2024 -- are listing the basic plans for floating at 1.27% -1.52% and fixed between 2.22-2.47% but if you are first time borrower ( which we obviously aren`t) with a high mortgage of over 50 million the rates are significantly reduced floating between 0.48-0.73% and fixed 1.32-1.57% .
So do these newly posted rates eventually affect us ? -- https://www.smbctb.co.jp/en/loan/produc ... terest.pdf

I personally am not fearful of small increases over time as it is so ridiculously low to begin with --- When I was living back in Canada back in 2000 I was paying 10% on my student loans and mortgage rates were just as high -- and though the dropped as low as 3.5% over the last 24 years -- they are back up to 6% now according to my friends who work in real estate.

anyways it is definitely confusing about when these increases might start to effect borrowers -- but my gut instinct is to keep with the variable.

[Deep Blue]

I think rates are going to go up, but likely to be 25-75 bips worth of rises over the next few quarters. Nothing like 400-500.

Why do I think rates will rise slightly?

1. Weak yen is very difficult for the majority of the Japanese population as it raises costs of importing oil, gas and imported food.
P

2. MoF is blowing tens of billions of dollars worth of forex reserves to keep the yen sliding further.

3. Japan needs to import labour and wages are insufficient to attract even SE Asian labour when the yen is this weak

4. Slightly higher rates will benefit a lot of households and corporates, many are net cash and financial repression has meant they’ve earned 0% of their savings for many years. This will partially offset the effect of slightly higher mortgage payments.

5. Desire to return to normal monetary policy which gives the central bank more room in future to stimulate the economy, which they’ve been unable to do due to the zero lower bound. All negative interest rates achieved was to fuck up the banks.

These are the main reasons I think BoJ will let the policy rate drift up to 0.25-0.75% which is consistent with an economy growing at 1-1.5% trend growth.

Most likely we see one hike this year and one or two next year, depending on how the Japanese and global economy does.

[sakuramelodymusic]

Yes, this all makes sense to me.
And I agree it will be a slow -- small increase over the next few years like you said probably somewhere like 0.25-0.75% --I can see that happening based on what I have read.

I think the client I was speaking to who is high up person in the financial district might have meant -- that in 10-15 years -- we could see interest rates of 4-5% but it would slowly slowly creep up -- which is why I was leaning on the sticking with the variable rate as well. 10-15 years from now our mortgage will be even smaller then now anyways. but like you said that is all dependant on how the Japanese and global economy does -- and if wages are increased and I am sure many many other factors.

Anyways , Thanks for weighing in !

[beanhead]

I have heard through the grapevine from some of my clients who work in the financial district that they believe it will take around 5 years for the variable rate to reach 2.0% and another 5 years for it to reach 4.5-5% floating rate ( meaning the fixed rate could be somewhere around 6-7% 10 years from now similar to North American mortgage rates ) -- do you believe this as well ?

Please let us know which institutions they work at so we can keep away from them

Don't worry too much about the news, either.
If you can afford to pay more for your mortgage, why not start preparing to do so anyway, and keep that money in a separate bank account. You could use this money to pay down the loan later, if rates do rise uncomfortably.

[sutebayashi]

Can't see it being politically feasible.

It’s a political decision?

do you see a similar bubble happening

Monetary policy is about inflation, no?

[sakuramelodymusic]

***Please let us know which institutions they work at so we can keep away from them *****

I prefer not to name names -- but one of the biggest banks in Japan.

****

If you can afford to pay more for your mortgage, why not start preparing to do so anyway, and keep that money in a separate bank account. You could use this money to pay down the loan later, if rates do rise uncomfortably.****
[/quote]

I am less worried the my husband but yes, we have come up with a plan after reading through these responses and some other pages about this situation -- greatly appreciate everyone's responses. -- my husband is much closer to retirement then I am -- so we have been doing a lot of financial scenarios and juggling -- many things to consider -- this is just one of many but this column has been super helpful in our debate/ discussion.


Sorry I haven`t figured out how to use the quote feature properly yet !

[Chizakura]

I would make that dependent on two things:

1.) do you have or plan children? If so, I'd go with a fixed mortgage until they are out of school. On average you will pay for that, but the increased security is worth it IMHO.

2.) how well do your jobs adapt to inflation? The better, the less need for a fixed mortgage.

Thinking about how rates will change in the future is not really helpful at all. The question is rather, what is the exact impact if they do. In the bad case you might have to reduce your standard of living a bit, in the worst case you have to move out. Even a fixed mortgage will usually just delay this process (which is often what you want if you have children).