Question on house loan

[eagleyes]

Hi to the community here,

I am investigating to buy a mansion here in Tokyo. I visited a few apartments and I am now considering the bank loan.
I am gathering information on my side but would like to hear some real experience as much as we can share.
What I would like to know is if you preferred flexible interest rate or fixed one? I am not a big fan of the flexible rate. It seems too risky as nobody can know what the future will be. The fixed interest rate cost more and there is less risk. the Fudosan is pushing for the flexible rate.
I would like to know also If you took the loan for 30 or 35 years or any other duration and why?

Last question which is still a mystery for me. How can young japanese couple afford to buy mansion in the 80 million yen range with an annual salary around 5 to 7 million yen a year for a person in its 30s (source: Toyo keizai). It seems that new mansions are purchased without an hesitation as I was told many programs are already sold out here and there.

Thanks for any ideas or inputs.

[RetireJapan]

I got a 110% loan to buy our manshon, at a floating 0.5% rate for 30 years.

To put that in context, the total amount of the loan was 9.9m yen, which is about 1.5 times my gross salary, and about two years' saving for our household.

If the amount had been substantially higher I would have chosen a fixed rate loan, but even in the worst case scenario we could just pay this loan off in a year or so if rates go up beyond our comfort zone.

Our bank (all banks?) also has protection built into the floating rate. It can't go up by more than 25% every five years, so it is much less risky than a true floating rate based on interest rates.

I have no idea why someone would be comfortable with a mortgage worth more than ten times their annual salary...

Anyone else?

[StockBeard]

Personal experience: went with a fixed rate (1.72% if I recall correctly) for 35 years. My rationale: I can get better returns than that semi consistently with index funds, so let's go with a stable low rate for as long as possible and as big a loan as possible to 1) reduce the monthly payment and 2) get free money to invest. Statistically, it's the safest bet from my perspective. Variable rate is making a huge bet, and sure it has worked well for the people who went with it so far, but I valued more the stability vs the extra risk in my case.

Last question which is still a mystery for me. How can young japanese couple afford to buy mansion in the 80 million yen range with an annual salary around 5 to 7 million yen a year for a person in its 30s

I'd say they can't, or are delusional about it, or have two salaries (i.e household income between 10 to 14 million yen). 1) House ownership has been regularly pointed out as a huge destructor of wealth in Japan (see https://www.scribd.com/document/237374520/Np-20081I37 ). 2) The people I know who buy houses in the 80 million range are people who make 10 million or more a year for the household. I'd assume people with 5 to 7 million a year are digging themselves into a financial hole if they do that.

[ricardo]

I went with a fixed rate (1.25%), which is effectively 0.25% because of the 1% home loan tax refund. I just wanted peace of mind - for the first ten years (after which I will probably pay off the remaining amount with capital from a pension scheme).

I don’t see how someone with the income you mention could be a property for the amount you mention - unless they and the bank are willing to make assumptions about future growth in their income. If they are a professional with a traditional Japanese company, or a doctor, then they could realistically make such an assumption.

[Petronius]

I went with 1.58% fixed 35 years in February this year without any insurance at SMBC.
Floating 35 years was 0.55% (before any insurance) if I remember properly.

The reasoning is quite similar to Stockbeard's;
I can pay back the loan in less than 10 years without penalty however the spread on the 35 years fixed rate is an option on investment returns combined with an insurance.
35 years makes my monthly payment small enough that either I or my wife could easily pay them and keep our lifestyle on only one salary if needed. Combined with the safety of fixed rate this therefore negates the need for any insurance on the loan.
This also gives us the option to either repay the loan early or keep paying the loan and invest this money instead (buy a second house?)

With a floating rate I would either have wanted to borrow on a shortest period to hedge the risk or I would have to give up one of the above advantages by keeping cash at hand to repay the loan early if necessary.

Edit: and you can easily calculate the cost of this option if you already created an excel model of your investment. In my case it was only a few $1000 vs a 10 years fixed plus 25 floating for example.

[mighty58]

I took a loan this year, a 35 yr fixed, at 1.29% + 0.2% for insurance making it 1.49%. At these rates, it's hard to justify taking the long-term risk of a rate rise in exchange for a cheaper monthly payment in the short term. I don't claim to be able to tell the future, but given the low levels of interest rates we see now, it's my humble opinion that rates are more likely to go up than to go down.

A long-term fixed rate is also an excellent hedge against inflation. (with my loan in place I'm now rooting for Abe and Kuroda to finally meet their inflation targets!)

As for your question about Japanese young-family finances, I remember reading about this in one of those free weekly real estate mags. If I recall correctly, about one-third of buyers get help from parents or relatives, and the average amount of the help is approx. 10mil yen. Most Japanese buyers also pay a (relatively large) downpayment as well, between 10-20mil on average, from their own savings. Combine those and it works out to a fairly large amount, so any loan they are taking is much smaller than the price. But even with all that, it's still expensive to buy in Tokyo, and I also am puzzled with the same question. I suspect many are borrowing against future expected earnings and/or expected inheritances (banks give outsized loans to seishain and koumuin based on expected future earnings, and if your parents own a house in Tokyo, that'll be a sizable inheritance). I also suspect that if you scratch the surface, you'll find many families that are otherwise keeping up appearances are stretched well beyond their means.

[AinT]

We changed from a variable to a fixed this year. (amounts are approximate)
Prior to change the remaining amount was ~ ￥15,000,000 over 15 years @ 0.85% variable with MUFG
After change to fixed we went to ~￥15,000,000 over 15 years @ 0.91% fixed with Sony Bank.

There was a ~￥250,000 fee attached to the remortgage process but we felt that was a small price to pay to lock in such a good fixed rate.
There's a real peace of mind knowing exactly what the required payments will be with no potential for variation.

[ricardo]

We changed from a variable to a fixed this year. (amounts are approximate)
Prior to change the remaining amount was ~ ￥15,000,000 over 15 years @ 0.85% variable with MUFG
After change to fixed we went to ~￥15,000,000 over 15 years @ 0.91% fixed with Sony Bank.

There was a ~￥250,000 fee attached to the remortgage process but we felt that was a small price to pay to lock in such a good fixed rate.
There's a real peace of mind knowing exactly what the required payments will be with no potential for variation.

¥250k is not a ‘small price’ (it’s about 4 or 5 times your monthly repayment) and I don’t think the fixed rate is that good.

But I agree with your key point - peace of mind.

Interesting that your existing lender presumably didn’t want to or couldn’t offer a competitive fixed rate.

[eagleyes]

I went with a fixed rate (1.25%), which is effectively 0.25% because of the 1% home loan tax refund. I just wanted peace of mind - for the first ten years (after which I will probably pay off the remaining amount with capital from a pension scheme).

Thanks for your reply. The loan cost is very low then. Stupid question but is the home loan tax refund applicable for mansion as well?

I don’t see how someone with the income you mention could be a property for the amount you mention - unless they and the bank are willing to make assumptions about future growth in their income. If they are a professional with a traditional Japanese company, or a doctor, then they could realistically make such an assumption.

I guess you are right. Doctors, lawyers can afford that. But it seems there are a lot of doctors and lawyers in Tokyo then! ahah! I think people in large companies have the potential to obtain loan form the banks based on the future growth of their income.

[ricardo]

I went with a fixed rate (1.25%), which is effectively 0.25% because of the 1% home loan tax refund. I just wanted peace of mind - for the first ten years (after which I will probably pay off the remaining amount with capital from a pension scheme).

Thanks for your reply. The loan cost is very low then. Stupid question but is the home loan tax refund applicable for mansion as well?

I don’t see how someone with the income you mention could be a property for the amount you mention - unless they and the bank are willing to make assumptions about future growth in their income. If they are a professional with a traditional Japanese company, or a doctor, then they could realistically make such an assumption.

I guess you are right. Doctors, lawyers can afford that. But it seems there are a lot of doctors and lawyers in Tokyo then! ahah! I think people in large companies have the potential to obtain loan form the banks based on the future growth of their income.

Yep, Tokyo’s a big, rich place....

I THINK it is applies to any NEW property - but I’m not sure. Check with the JTA/your lender/ your builder. (The JTA being the most important).