October.2024　The Bank of Japan Raises Interest Rates: How Will Variable and Fixed Rates Change? An Analysis of the Latest Mortgage Rate Trends.

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How Does an Interest Rate Hike Affect Mortgage Rates?

On July 31, 2024, the Bank of Japan (BoJ) raised the short-term interest rate.

The BoJ’s monetary policy has a substantial impact on mortgage rates in Japan. Since 2016, the BoJ has pursued “monetary easing” by managing both “short-term” and “long-term” interest rates to maintain a low-interest environment. This policy aims to lower interest rates by injecting funds into the financial markets, stimulating the economy.

Previously, the BoJ applied a -0.1% negative rate to short-term interest rates and kept long-term interest rates low by purchasing a large amount of government bonds. However, in March 2024, the BoJ altered its policy, shifting the short-term rate target from negative to effectively zero.

In its late July 2024 meeting, the BoJ raised the short-term interest rate target to 0.25%, signaling a gradual move away from negative rates, with more rate increases anticipated in the future. For long-term interest rates (10-year bond yields), the BoJ also decided to scale back its government bond purchases, possibly allowing long-term rates to rise gradually.

What Does This Mean for Mortgage Rates?

Due to the BoJ’s policy changes, mortgage variable rates are showing signs of gradual increase. As of October 2024, some banks have already raised mortgage variable rates by 0.15%.

Those considering real estate investment or apartment loans should conduct a careful analysis of how potential rate increases may impact their finances, ensuring their repayment plans are sustainable under rising interest rates.

The Effects Begin in 2025!

The BoJ’s rate hike decision in July 2024 means that increased mortgage payments will take effect in January 2025. Many banks have a three-month delay between rate increases and their application to mortgage repayments.

For example, if someone has borrowed 35 million yen over 35 years, a rise in the interest rate from 0.5% to 0.65% will mean a monthly repayment increase of about 3,000 yen.

What is the “5-Year Rule”?

The “5-year rule” prevents a sudden jump in mortgage payments by keeping monthly repayments the same for five years, regardless of interest rate changes. During this period, the portion of the payment going towards the principal may decrease, while more goes towards interest. However, this “5-year rule” only delays repayment, meaning that borrowers will face the deferred amount at the end of the 5-year period.

Overview of Mortgage Rate Types and Latest Interest Rates (October 2024)

1. Variable Rates:
   • Variable rates are revised every six months, and repayment amounts are adjusted every five years. Thanks to the “5-year rule,” rapid increases are avoided, but the risk remains of a slower reduction in the principal and a potentially higher total repayment amount.
2. Fixed Rates:
   • Fixed rates remain constant over a specific period, allowing borrowers to avoid interest rate hikes. Popular options include the full-term fixed type (e.g., Flat 35) and term-select fixed types (e.g., 10-year fixed). Fixed rates suit those who prefer stability, though they tend to be higher than variable rates.

Current Mortgage Interest Rates

• Variable Rate: 0.4% – 0.5%
• 10-Year Fixed Rate: 1.1% – 1.7%
• Flat 35 (Fixed Rate): 1.82%

Data as of October 2024 (Source: Bank websites)

Changes in Mortgage Interest Rates for New Loans (From September to October)

Data as of October 2024 (Source: Bank websites)

Latest Real Estate Investment Loan Rates (October 2024)

It’s crucial to review the latest interest rates for real estate investment loans as of October 2024. Similar to residential mortgages, investors can choose between variable and fixed interest rates, though the rate levels and lending conditions differ, making careful comparison essential.

Sample Real Estate Investment Loan Rates (October 2024)

Data as of October 2024 (Source: Bank websites)

Unsure Whether to Choose Fixed or Variable Rates? Consider a Mix Loan

A “mix loan” is an option for those who can’t decide between fixed and variable rates. By combining both, borrowers can spread risk and keep interest costs low. However, keep in mind the possibility of additional fees, and note that the full benefits may not always be realized.

How Are Mortgage and Investment Loan Rates Determined?

Just like residential mortgages, real estate investment loans have both variable and fixed interest options, each based on different benchmarks.

Benchmark for Variable Rates

Both residential mortgages and investment loans use the short-term prime rate as a benchmark for variable rates. This is the best interest rate that banks offer to the most creditworthy businesses, and it changes based on the Bank of Japan’s (BoJ) policy rate.

What is the Short-Term Prime Rate? The short-term prime rate serves as a base rate for bank loans to businesses for less than a year and underpins the variable rates for both residential mortgages and real estate investment loans.

Effect of BoJ’s Policy Rate When the BoJ raises its policy rate, the short-term prime rate rises too, which generally leads to higher mortgage and investment loan variable rates. The BoJ has recently indicated the possibility of further rate hikes, suggesting that variable rates could continue to rise.

Benchmark for Fixed Rates

In contrast, fixed rates are based on long-term interest rates, especially the 10-year government bond yield. Mortgage and investment loan fixed rates are directly affected by this long-term interest rate.

What is the 10-Year Government Bond Yield? This yield represents the return on a government bond maturing in ten years. Its movements depend on the supply-demand balance and market trends and are heavily influenced by the economic policies of major countries, like Japan and the United States.

Long-Term Rate Trends

In 2024, U.S. long-term rate increases and changes in Japan’s monetary easing policy have driven the 10-year government bond yield in Japan to rise, reaching a peak of 1.075% in May. This has consequently increased fixed rates for both mortgages and investment loans.

Interest Rate Trends for Mortgages and Investment Loans in 2024

As of October 2024, variable rates remain low, though they may rise depending on BoJ policy. Variable rate ranges are approximately 0.4% – 0.5% for mortgages and 1.3% – 1.9% for investment loans.

Fixed rates are trending upwards, with mortgage 10-year fixed rates around 1.1% – 2.0% and investment loans generally near 2.0%. If long-term rates continue to climb, further fixed rate hikes are likely.

Summary

Mortgage and real estate investment loans have variable rates based on the short-term prime rate and fixed rates tied to long-term rates. Based on 2024’s rate trends, it’s important to consider potential rate fluctuations when choosing a loan type that aligns with your financial planning and investment strategy.

For investment loans, securing financing at a low rate can be key to success, as higher rates can directly impact cash flow. While it’s wise to monitor interest rate trends, it’s also essential to consider factors beyond interest, such as future price trends in specific areas. This focus on location and growth potential could be just as critical to making a successful real estate investment.

Get information on Japanese real estate investment (investment condominium) with「 Dr.Asset Recommender! 」You can also check earthquake and flood risks.

「Dr.Asset Recommender」 is a service for those looking to purchase used condominiums, both for investment and personal use. Not only can you receive information on Japanese real estate investment (investment condominium), but you can also learn about earthquake risks (building collapse risk, fire risk, and difficulty of disaster response). Start by registering today!

Sign up here → “Dr.Asset Recommender”
Registration is free, and there are no fees until you actually purchase a property.

What is “Dr.Asset Recommender”?
It’s a service that sends property listings matching your desired criteria directly to your email, without the need to visit a real estate office. It also provides valuable content such as market prices, safety information, earthquake risks, and AI-predicted rental yields (in case you decide to rent out the property). With “Dr.Asset Recommender,” you can receive property information that matches your preferences straight to your inbox!

Benefits of “Dr.Asset Recommender”:

• Receive property information that matches your preferences via email
• Access to market price data
• Get insights into the local crime risks
• Understand earthquake and flood risks
• View sales history of the specific condominium
• Compare sales history of similar condominiums in the area

These are just some of the great features our service offer

＜Related Articles＞
How to Use 「Dr.Asset」： Get the Best Real Estate Investment (Investment Condominium) Deals in Japan