So, you are trying to get a loan from a Japanese bank to invest in Japanese real estate. The road ahead of you is not without its potholes and sharp turns, but with some grit and determination you will be able to navigate all of the paperwork and ultimately get access to the bank’s money, with one of the lowest interest rates in the world. As a primer for the following information you may wish to read through “How To Get An Investment Mortgage In Japan” which outlines the requirements for borrowing; not everybody is eligible, so save yourself some time queuing up at the bank from the comfort of your own home now. Let’s get to it…
Investment Mortgages From Japanese Banks
All Japanese banks are different. As in- extremely different. Even among different branches of the same bank they will have different procedures, requirements and biases. Megabanks in Tokyo are more ‘used to’ foreign customers but may have quite strict terms for their loans. Regional banks (the small ones all over Japan that you have seldom heard of) are not well versed in dealing with foreigners but are much more forthcoming with large sums of the bank’s money if you meet their requirements (which are often less onerous than those of the megabanks).
What You’re Looking For In A Property Loan
The key variables of a bank’s real estate investment loan product (because that’s what they are, products) will be the following:
Fixed Or Variable – Will the annual interest (APR) on the loan be consistent throughout the duration of the loan, consistent for a period of the loan, or variable whereby it changes at pre-determined intervals. It is extremely uncommon for investment mortgages to be offered on a fixed basis. At this point in time, interest rates remain unchanged from their post global-financial-crisis floor. That is, close to zero. Because of this, when speaking of the direction of interest rates in the future, the only way is up. Because of this, it makes little business sense for the bank to offer a fixed rate if you are willing to accept a variable one because the bank will increase the profitability of the loan with each concurrent increase in the base rate (and your APR) in the future. Do not be fooled by a variable APR % that is lower than the offered 5 or 10 year fixed APR. Once the Bank Of Japan sets about tapering in the future (as is happening in the US at present) your variable rate APR % will soon exceed that of the fixed rate mortgage. This knowledge alone could potentially save you hundreds of thousands of dollars (sorry- millions of yen) over a 30 year loan term.
The Interest Rate / Annual Payback Rate (APR) – Lower is better but do not make the mistake of thinking that you can get a flat-35 prime rate mortgage for a property investment. Residential mortgages and investment mortgages are different products. There is more risk for the bank with an investment loan so this translates into a higher APR to compensate them for the risk. An investment mortgage will likely run from anywhere between 1.2% p.a to 4.5% p.a. You may find yourself with a couple of options at different banks and there will be no “correct” choice, e.g 1.5% p.a variable rate or 2.5% p.a fixed rate for 5 years – your decision would be dependent on your opinion on the interest rate environment in Japan in the future- probably a conversation best to have with your Housekey adviser.
Loan Term / Duration – This is another consideration that will be determined by your objectives. For those looking to take advantage of negative gearing- i.e creating a deficit in free cash flow so as to create an operating loss and enable them to get a tax refund (i.e the people with high annual incomes who are higher tax-rate payers), a shorter loan term would be preferable because the repayment schedule will be condensed and the monthly repayments higher- so more easy to eclipse the monthly free cash flow from the property and create the “operating loss”. For those who wish to produce free cash flow (i.e passive income) the longer the loan period the better as this will mean that the loan repayments are smaller and the remaining money each month can be used to invest in other assets, buy more property, or pay for a lifestyle without having a day-job.
Restrictions – Each bank will have conditions that have to be met by the property that you are intending to purchase. Some banks may not lend against wooden properties (which would be a problem for somebody looking to strategically reduce their taxable income during a 4 year period to offset a large annual salary being received during those 4 years). Some banks may not lend against properties built before 1981. Some banks may not lend on properties outside of Tokyo. To successfully complete a real estate transaction using the bank’s money the theme will very much be compromise, and you can make the process a lot smoother by finding out on day one what the bank will and will not lend for.
Words Of Advice
Do not expect things to go smoothly where it comes to financing. Each and every lending decision from a bank crosses multiple desks internally, manned by different people before it gets to you. There are also internal politics and directives surrounding how much credit needs to be extended to lenders, and extra restrictions placed upon those lenders when these levels are close to the bank’s limits for that calendar period. You may not be able to buy the property that you were most interested in because they deny it. You may not be able to get the loan term that you wanted because of your age, or the interest rate may be higher than you had hoped. You may have to put down a larger down-payment than expected. There are any number of things which are subject to change. That withstanding, you should not let this get in the way of your deal- after all, you are free to re-finance at another bank in the future if you ever find a better offer, but interest rates will definitely not stay at the bottom for another 10 years.