Home loans and interest ratesThe development of the economy and interest rates can influence the demand for home loans and the ability of borrowers to fulfill their monthly payment obligations. In Japan, home buyers generally prefer variable rate loans to fixed-rate loans. Unlike fixed-rate loans, interest rates on variable rate home loans can be adjusted over time. This usually results in lower interest rates at the expense of borrowers being more vulnerable to potential changes in interest rates.
Variable home loan rates are usually benchmarked against the short-term prime lending rates of major Japanese banks, while long-term interest rates, such as the interest rates on 10-year government bonds, serve as a benchmark for fixed-rate home loans. Due to the zero-interest rate policy adopted by its central bank, Japan had a low interest rate environment for decades, creating a favorable environment for home loan borrowers that was further enhanced by competition between banks. Recently, however, a change in the Bank of Japan’s policy regarding long-term interest rates led to a number of banks raising their fixed-rate housing loan rates.
Biggest lenders and the Japan Housing Finance AgencyOutstanding home loans to households in Japan totaled 227 trillion Japanese yen in 2022. The value of new mortgages fell by four percent year-on-year, which was associated with a decline in construction starts of single-family homes.
Commercial and cooperative banks were the largest lenders of home loans. In addition, nonbank financial institutions, such as life insurers or mortgage banks, offer home loans in the Japanese market. Homeownership is supported by the government through tax breaks for borrowers. The government-affiliated Japan Housing Finance Agency ensures the provision of long-term fixed-rate home loans through securitization support and complements the private market with home loans for reconstruction in disaster-affected areas and other loans. The JHF provides so-called Flat 35 loans, long-term fixed-rate housing loans for up to 35 years, in partnership with private financial institutions. With its loan purchase program, the JHF accounts for roughly 10 percent of outstanding home loans in Japan.