RetireJapan

Just caught a news report saying that twice as many people are opting for fixed rate mortgages compared to a year ago. I can see why, still not convinced it is a clear cut better option.

Any thoughts?

Like anything in investing it comes down to risk tolerance. But I remember reading a break down (although I can't find it for the life of me now) where if interest rates stay this low on variable loans for the first 10 years of the loan, even if interest rates go up past the current level of fixed rates (obviously not a ridiculous amount past), you will still save money in the long run, as the first 10 years carries the most principle to pay interest on.

Like a lot of people, I believe the BoJ is unlikely to to raise interest rates for the foreseeable future, as it would tank the economy. The government would be unable to service the interest on it's debt, and there would be a huge drop in spending as most mortgages are variable rate and people would feel the pinch.

It is funny because I was regretting not going for variable rate mortgage 3 years ago since I also think the rate is not going to change for very long time.
But at that time my risk tolerance and my long term plans where different. I hope to be right in the end...

eagleyes wrote: ↑Fri Jul 22, 2022 12:54 am But at that time my risk tolerance and my long term plans where different. I hope to be right in the end...

If you are able to pay off your mortgage without difficulties you were right. No sense in second guessing decisions based on results (better to focus on process and why you made the decision).

RetireJapan wrote: ↑Fri Jul 22, 2022 1:20 am No sense in second guessing decisions based on results (better to focus on process and why you made the decision).

This is so true. This should actually be taught to everyone in school!

gnakarmi wrote: ↑Fri Jul 22, 2022 4:54 am

RetireJapan wrote: ↑Fri Jul 22, 2022 1:20 am No sense in second guessing decisions based on results (better to focus on process and why you made the decision).

This is so true. This should actually be taught to everyone in school!

Basically everyone should learn to play poker

As someone who will hopefully start looking to buy a place this autumn, is there a general consensus in the RetireJapan community that variable rate mortgages are the best option then?

ExpatScot wrote: ↑Mon Jul 25, 2022 3:12 am As someone who will hopefully start looking to buy a place this autumn, is there a general consensus in the RetireJapan community that variable rate mortgages are the best option then?

I wouldn't go that far.

The basic decision is between a variable rate and a fixed rate (hybrid mortgages that are fixed for x years, then variable after that seem like a suboptimal choice to me).

A variable rate is likely to cost less over the time of the mortgage but includes the risk of interest rates going up. How likely this risk is, and how dangerous it would be to you, is not known.

A fixed rate is likely to cost more but you can sleep easy knowing that it will not go up in the future. In the case of interest rates going up, you will be very glad to have one of these.

As with many things in personal finance, how much you value peace of mind is going to affect your decision here.

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.

.........

But if that does not meet your risk appetite you already have your answer.

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

TokyoBoglehead wrote: ↑Mon Jul 25, 2022 11:55 am 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