Banking April 2014

the Home loan maze

Buying property in Japan can be daunting yet profitable

  • Permanent residents have greater choice of mortgages
  • Banks often reluctant to lend to foreigners
  • Most loans in Japan are flexible and include life insurance

Whereas headlines in the UK highlight the difficulty borrowers are having qualifying for loans, Japanese banks are struggling to find sufficient numbers of potential borrowers, or at least those who fit their criteria.

According to the UK’s Council of Mortgage Lenders, the average loan-to-value ratio is currently 80%. This figure has increased over the last 12 months, with many people attributing the strength of the London property market to demand from overseas buyers.

In contrast, residential property in Japan is largely driven by internal demand, although there is now considerable interest from overseas investors.

Some Tokyo investors are eyeing potential opportunities in preparation for the 2020 Olympic and Paralympic Games. The market seems to place a premium on property with views, or in the vicinity, of famous landmarks.

Discerning investors who find good locations with improved infrastructure will no doubt be rewarded.

Among the benefits of property investment in Japan are greater choice and quality than the rental market. Mortgage repayment costs are also usually 5%–6% less than rental rates. This allows the borrower to steadily reduce their mortgage and build up equity.

Many potential investors are concerned about the consumption tax increase implemented at the end of March, but the fixed asset tax (koteishisanzei) levied on property is distinct from consumption tax.

Fees for legal registration are set to rise, but consumption tax is not expected to have a significant effect on prices, even if investor sentiment may suffer.

Most Japanese investors prefer to minimise lending and pay back loans early. According to an official at Mizuho Bank, 80% of Japanese applicants select variable interest rate loans. Current rates are 0.775% variable and 1.45% for 10 years fixed.

My assessment is that it is reasonable to take an aggressive approach to the loan size, but to be conservative with the interest rate. This could mean taking a 100% loan, even capitalising loan costs, but fixing the interest rate for at least 10 years or the full mortgage term, which frees up capital for other investments.

Buy-to-let mortgages exist in Japan, but are less widely used than in the UK, where private investment in a second property is common. Reflecting the greater risk of mortgage delinquency, there is a mortgage premium for Japanese investment property with variable rates at 2%–4%.

It is fair to say that lenders are nervous about providing loans to foreign nationals, which makes it essential to take great care with the loan application.

An important factor in borrowing is residential status, or the willingness of a Japanese spouse to act as guarantor (rentai hoshounin). This is because repossessions are easier if the mortgagee has resident status in Japan.

A permanent resident’s visa increases lending options. The most attractive rates are offered by high-street banks such as MUFG, Mizuho, SMBC and Shinsei.

Flat 35 products are very reasonable long-term fixed-rate loans subsidised by the government. These mortgages can only be used for property that satisfies certain criteria, such as energy efficiency, durability and earthquake-resistant construction.

Sample rates for these loans are 2.01%–2.09%, fixed for 35 years, and are offered by lenders such as Resona and SBI Mortgages. Rates are similar to regular long-term rates, once arrangement fees and life insurance premiums are added.

Group credit insurance, ie life insurance, is included in the interest rate for most mortgages, but not for Flat 35 loans.

This is a valuable benefit that, in other countries, represents an additional personal expense. In Japan the cost is built into the interest rate. This means the loan will be paid off and the unencumbered asset passed to the spouse should the applicant pass away within the loan term.

Lending options for non-permanent residents also exist, but rates are typically higher or require a larger down payment.

Borrowers must usually make a minimum down payment of 10%–20% of the purchase price. Real estate fees add up to 7% of purchase value, so this can translate into a total outlay of 27% of the purchase price.

Some people may argue that a traditional portfolio lending approach has allowed Japan to avoid the problems associated with lax regulation and mortgage innovations, such as mortgage-backed securities.

On the other hand, lending innovation and differentiated products would boost lending and cash flow from non-resident foreign investors.

A Singapore-based investor recently elected to fully fund his purchase of real estate in Daikanyama due to “a lack of attractive funding opportunities”, saying that, “Despite what the Abe administration is trying to achieve, it’s still oddly inconvenient to invest in Japan”.

Anecdotally, banks have been cautioned only to lend to customers when the reason for lending can be clearly demonstrated. The interpretation of this guidance has made investments by non-resident foreigners more difficult.

Lenders such as Orix Trust, NAB Asia and the Bank of China offer loans to non-residents, although restrictions or lower lending ratios apply.

Understanding the requirements, underwriting processes and lending criteria of banks, as well as the reasons for rejections, can be frustrating. This is particularly so when rejections are communicated as sougoteki na handan, which can be translated as a general assessment or, perhaps more accurately, as a decision without explanation.

The experience, knowledge and ability to interpret cultural passwords, as well as a long list of contacts at financial institutions, are invaluable advantages a mortgage advisor can bring to the table.

Even if the application process is arduous, those who get approved for a mortgage can benefit from low fixed interest rates, marginal fees for non-scheduled prepayments and affordable life insurance included in the interest rate, as well as other banking benefits.

A recent client described closing on a 30-year loan with a 15-year locked rate of 1.65% for a second property. “For Westerners, that’s pretty much free money”, he said.