Majority of mortgages now adjustable-rate

Ryosuke Yamauchi / Yomiuri Shimbun Staff Writer

With the Bank of Japan sticking to its ultralow interest rate policy, there has been a sharp increase in the number of people taking out adjustable-rate mortgages.

Some financial institutions are offering products with annual interest rates starting at 1 percent or less, apparently in an attempt to jump on the bandwagon by shifting their focus from fixed-rate loans.

However, this sort of lending policy could prove risky for home buyers in that if the central bank's interest rate takes an upward turn, an adjustable-rate mortgage would weigh more heavily on borrowers than would the fixed-rate type.

According to a survey by the Japan Housing Finance Agency, about 50 percent of borrowers taking out new mortgages are opting for adjustable-rate home loans, a significant increase from 9.4 percent in January 2007.

Three major domestic banks--Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Mizuho Bank--say 80 percent to 90 percent of their customers have been choosing adjustable-rate loans since the beginning of this year.

An important factor behind this trend is the belief that interest rates for adjustable-rate mortgages would not rise in the immediate future as the central bank is likely to keep its key rates at an ultralow level. Since 2009, financial institutions and housing developers have been increasingly working together to introduce products that enable customers to take out home loans with annual interest rates at 1 percent or less if they meet certain conditions, such as making a predetermined down payment.

Major banks currently set annual interest rates for 10-year, fixed-rate mortgages at about 4 percent.

By increasingly focusing on mortgage products, banks seem eager to attract more individual customers as sluggish capital spending and other negative factors have discouraged corporate customers from taking out loans.

Financial institutions have found it easier to lower interest rates for adjustable-rate home loans, when compared with fixed type mortgage products. Therefore, some banks appear to hope to win over customers by lowering mortgage rates, even though it would result in reduced profits.

Lowering mortgage rates "could lead to sales of other financial products," an executive of a major bank said.

To promote home sales, housing developers tend to recommend to customers that they take out adjustable-rate mortgages, which require lower mortgage payments early in the life of the loan.

Meanwhile, long-term lending rates have fallen since the beginning of this month, amid deflation concerns not only in Japan but also in the West, thereby boosting the popularity of adjustable-rate mortgages.

"As long as interest rates are expected to remain low, adjustable types of home loans will continue to be popular," one bank official said.

Meanwhile, adjustable-rate mortgage interest rates are reviewed every six months. If market interest rates rise on the back of an economic recovery or other positive factors, interest rates for loans also will rise, possibly forcing customers to change payment plans.

"It's important for people who take out adjustable-rate mortgages to make flexible payment plans," financial planner Kenichi Nishihara said. "They also need to be prepared to switch to fixed-rate types when their payments can be fixed at a lower amount with a low interest rate."