With the recent BoJ news regarding Rise In Interest Rates: loan variable vs. fixed

[artosgalleries]

Source:
- https://www.boj.or.jp/en/about/press/koen_2024/ko240208a.htm
- https://richardkatz.substack.com/p/how-much-change-when-boj-eventually

If you were to sign up for a home loan in the near future: would you settle with a variable rate or fixed? Curious of folks reasoning, as I’m in this position.

 

[arcticwind]

@artosgalleries the best post on the topic is here: https://www.reddit.com/r/JapanFinance/s/xqH49wzCNQ

it's a gamble either way, but personally if I could do it right now I would go variable. My thesis is that the BoJ won't have that much room to go up and might even have to backtrack, and even if the trend is up it will happen slowly enough that the way the amortized payments work, I'm guessing I'll come out ahead.

 

[dylanrowe1]

@arcticwind Thanks for sharing that write up

BOJ announced increasing interests for this year, and if I remember correctly, they will increase it each quarter. Is that correct?

 

[hark]

@dylanrowe1 central banks write bizarre kabuki theater documents. They never clearly declare that they will raise rates consistently for a several quarters. That's someone trying to read the tea leaves.

 

[arcticwind]

@dylanrowe1 No one knows.

 

[victoria37]

@artosgalleries Run the numbers and choose based on your risk tolerance. How fast do you think rates will go up, and by how much? Do you think rates will go back down?

Even if the BoJ policy rate went up by 1%, variable would still be cheaper than most 35 year fixed rate loans. Do you think rates would go up by over 1.25-1.5% for the entire 35 year term and never come back down? Over a 35-year term a variable rate of 0.4% for 5 years, 1.2% for the next 5 years then 2% for the remaining 25 years is cheaper than fixed at 1.5%.

A fixed rate loan is paying extra for peace of mind and that's totally up to your risk tolerance and financial situation. For example, if you're overleveraged, can't handle a 1.5%, 2% rate hike, and have maxed out on your income potential then you probably want fixed even if it costs more. If you've still got a ways to go in increasing your income, have a comfortable amount of savings, and can sleep well in the event of a 2% rate hike then variable is still probably going to be cheaper.

Also, note that what the BoJ is hinting at is the end of the negative interest rate policy.

One part of the BOJ policy is a slightly negative (-0.1%) rate on overnight funds that banks lend and borrow from each other. For most central banks, this is the major policy tool... Uchida hinted that, whenever the BOJ finally moves, it might simply bring the overnight rate back to 0.1%. Moreover, its purpose would not be to tighten monetary conditions, but “to maintain the functioning of the money market,” whose smooth functioning has been somewhat disrupted by the -0.1% posture.

If you're borrowing variable from a bank that uses the short term prime lending rate as the basis, then this particular change very likely wouldn't affect your interest rate at all. The short term prime lending rate didn't change at all when the BoJ went from 0.1% to 0% to -0.1%, so it's unlikely that moving from -0.1% back to 0.1% would affect it.

 

[paleouss]

@victoria37 I think this is correct.

The rate hike might be something like +0.2% which in that case a floating rate would still be a better deal.

 

[placemat]

@artosgalleries Tbh I would take variable. I can arbitrate an increase by selling other assets.

 

[hark]

@artosgalleries An important thing to understand about the Japanese mortgage market is that somewhere around 80% of mortgages are variable rate here (https://diamond-fudosan.jp/articles/-/1111448). In contrast, I think the US/UK cases were about 10%.

This creates a very different reality for a central bank that wants to change interest rates: One guy took a major gamble and lost. Sucks to be him. He loses his house. 50% of people in Kanagawa bet poorly and lose their houses, sucks to be the country.

So this makes it actually less fearful to be on a variable interest rate loan because the country can't afford to raise rates that much without capsizing the economy.

 

[sparrowly]

@artosgalleries TLDR: if they raise variable personal home
Loan interest rates any significant amount without a commensurate increase in income, millions of people will be homeless. BoJ actually isn’t THAT stupid.

 

[wwjrd]

@sparrowly Not sure why you are getting downvoted. Japan INC is super highly levered. Fuck the government is highly levered.

 

[sparrowly]

@wwjrd Haters gonna hate I guess, I don’t know. It’s fairly simple reality.

 

[resjudicata]

@artosgalleries Variable as the BoJ can't afford much of an increase.