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The Truth About 100% LTV Japanese Mortgages

For the most part, life as we know it works on the pay-to-play system. No money, no honey. To own a one million dollar house, you will have to have one million dollars to spend. Or maybe not. We all know of at least one place that a mouse can get free cheese.

Loans From Japanese Banks

If you go to your Japanese bank, tick all of the boxes for their requirements regarding visa status, time spent in Japan, Japanese language ability etc, and you also happen to be bringing home a lot in salary, then perhaps you’ll be able to buy your million dollar mansion with just 1/10th of the money. Pay the bank a 10% deposit and they’ll bankroll the rest. You pay them back a little each month for the next 30 years (plus interest expense) and everybody is happy. Lending for residential mortgages always has been, and always will be the core commercial function of retail banks. It is extremely lucrative (you as a customer receive 0.01% p.a in interest on your deposits held at the same bank that charges you 1%+ p.a for your mortgage loan. That’s quite the spread), it is extremely reliable (people keep up their repayments because they do not wish experience the night sky as a homeless person) and the risk to the bank is minimal- if somebody defaults on their mortgage repayments, the bank takes control of the house.

The conditions for real estate investment loans are different. Real estate investment loans are not tier-1 loans. They are not the bread and butter of the retail bank. They are profitable, but less reliable. Why? Because the man investing in the 100 million JPY property (note: the difference between between buying a property and investing in a property- if you live in it, it is not an investment), has a roof over his head somewhere else, and even if his investment property goes under, he will still sleep like a baby at night in his plush bed, atop his 1000+ thread-count designer sheets. Ultimately, this results in the default rate for investment loans being higher than that for residential loans. To combat the increase in risk, the bank must make extra provisions to guarantee profitability. This will include adjustments like:

– lower lending multiples (i.e less credit extended per unit of disposable income)
– more ‘selective’ qualifying requirements (e.g nobody who doesn’t already have their Japanese Permanant Resident’s permit)
– more requirements for the target real estate asset (e.g nothing constructed using wood, or nothing built before 1987)
– shorter mortgage duration (often limited to the remaining length of the depreciation schedule of the building)
– restriction on acceptable locations (e.g Tokyo = OK. Side of a mountain in Gunma = kibishii desu ne)
– larger down-payments required (e.g because of your situation, only 50 million JPY in credit can be extended to you, so you are required to put in the extra to get to the purchase price)

So, you may be forgiven for understanding this to mean that it is harder to get a real estate investment loan from a Japanese bank than it is to get a residential loan. Or at least, that the conditions that have to be met for an investment loan are more strict, or more ‘rigorous’? Ordinarily, yes. A 100% correct, incontrovertible fact. But what if we told you, that we could get you a loan for a sizable real estate investment here in Japan regardless? Even if your credit-worthiness is poor. Even if you don’t have much in cash savings, or even if you don’t have any cash savings at all for that matter. You can own a million dollar real estate investment without using your own money. That’s right. Free cheese.

 

Japanese “Overloans” And The Mythical ‘Zero-Down’ 100% LTV Mortgage

We have a tendency as humans to believe or rationalize that which is beneficial or advantageous to us, even in the face of irregularities (see: faith healers) and defiance of logic. As nice as it would be if it were possible for us all to become property millionaires overnight without having any money, it is rather unlikely. Although there have been property developments in Tokyo that are partnered with Japanese retail banks, offering up to 100% financing to Japanese buyers with solid credit and juicy salaries, these are residential mortgage products and the asset in question is the new family home- not a building investment.

For the reasons listed above, loans for the purpose of investment are fundamentally different to residential mortgages and have a different risk/reward profile for the bank which underwrites them. It should then be a surprise, to hear that there are real estate brokers offering real estate investments, coupled with and “overloan” or “100% LTV loan financing”.

Overloan: A loan for an amount of money which exceeds the purchase price of the property. E.g a loan of 115 million yen for a 100 million yen property (usually pay for transaction costs, fees and taxes)

LTV: ‘loan to value’, i.e a 50% LTV will mean that a loan of 50 million yen is given for a property with a purchase price of 100 million yen. a 100% LTV loan is a loan for the total purchase price of a property. In other words, a “zero down” mortgage.

 

What Goes On Behind Closed Doors At Your Real Estate Agent And The Bank

There has been a lot in the news recently about a particular Japanese bank that engaged in a bit too much nudge-nudge wink-wink with property brokers. The result was the bank losing half of its share price in 6 months, and a few (hundred? Thousand?) bankrupt borrowers. Banks cannot legally provide 100% financing on a property investment. Investment by definition is ‘speculation’. Japan is a risk-averse country. If the bank were to provide 100% financing, the borrower has zero skin in the game and can default at any time with zero personal loss. Bad for the bank. The general idea behind a real estate investment down-payment is that if its a worthwhile investment, the bank wants to see YOU put some money into it too. So how do people get 100% loans in Japan? Does the bank break the law? No. But somebody has to. The bank can only provide up to 90% of the purchase price of a property, so for a 100,000,000 JPY property, this would correspondingly be 90,000,000 JPY. But what if you were able to tell the bank that the purchase price was actually 111,500,000 JPY, while still meeting all the other requirements of the bank to ensure that the target property is accepted? That means that the bank will give you 90% of 111,500,000 JPY = 100,350,000 JPY, allowing you to purchase your 100,000,000 JPY property investment without using a penny of your own money, and still have enough money left over for a night out to celebrate your entry into the big league.

Is the bank a victim in all of this? No. The bank is often aware that there may well be a second (fake) sale contract in play to secure the financing. The bank will ensure however that they ‘stick to the rules’, and only extend up to 90% LTV. There may also be fake statements of assets (e.g a Photoshopped bank book) to support the application, ensuring that the client appears credit-worthy enough for the monstrously sized loan. Fundamentally, the loan officer wishes to issue loans. That’s his job, and his bonus is likely tied to his deal-flow. One hundred million yen lent out with an interest rate of 4% or 5% APR for 30 years is a massive profit for the bank. The real estate broker wants to sell property and pocket his fees. The bigger the property, the more fees. What they do not tell the client when they offer to support the “no-money down” mortgage option is the way in which it is achieved. But who cares? The client gets a free property investment without using any of their own money? Indeed, they do. But in life you must be careful what you wish for. There is only one place that a mouse gets free cheese. The potentially life-changing consequences of the over-loan will be laid out to dry in Part 2….

Why Real Estate Is The Best Asset Class (Part 2)

8 Reasons Why Real Estate Is The Best Asset Class (Part 1)

Transaction Costs For Japanese Real Estate Buyers

Taxes For Japanese Real Estate Investment

What Is A Cap Rate?

Why Tenants In Japan Are Great Investments

Holding Companies: Investing In Japanese Real Estate

Investment Loans: How To Choose The Right One

5 Point Checklist Before Investing In Real Estate

How To Calculate Your Breakeven Occupancy Ratio

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