[Buyers] Why are mortgage interest rates rising?

Hello,
I am Hamasaki, an instructor at the Real Estate Preparatory School.
I share my own personal experiences and explain terminology regarding how to buy and sell homes.

Well then, today I would like to talk about the theme of
“Why are mortgage interest rates rising?”
.

Recently, a customer asked me this at a model home, and I thought,
“That is certainly a valid question.”

“Prices are going up, so why are mortgage interest rates rising too?”
I think many people feel this way.

To begin with, why do interest rates rise?
This time, I would like to explain the mechanism behind it.

First of all, what is an interest rate?
It is the “percentage of the fee charged when borrowing money.”

For example, if you borrow 1 million yen at an annual interest rate of 1% and borrow it for one year without reducing the principal, the interest will be 10,000 yen.

With a mortgage, you pay back the principal little by little, but basically, the higher the interest rate, the more interest you pay.

So, who decides those interest rates?

Mortgage interest rates are decided by
each individual bank.
However, what greatly influences the bank’s decision is the
“Bank of Japan” and “market interest rate trends.”

The Bank of Japan is the
“BOJ” that you often hear about in the news.

The BOJ has a role in stabilizing prices, and as one of the means to achieve that, it raises or lowers interest rates.

Here, I will explain the
“relationship between prices and interest rates.”

For example,
when the burden of borrowing money is small,
it becomes easier for companies to build new stores and factories,
expand their businesses, and create new services.

For individuals as well,
it becomes easier to make large purchases such as a home.

Then,
the opportunities for money to be spent in society increase,
and when money circulates, it becomes a force that supports the economy.

On the other hand,
if there are too many people wanting to buy goods and services,
prices tend to rise.

Therefore, when interest rates are raised, the burden of borrowing increases, so

“let’s wait a bit on expanding offices or starting new businesses”
is what more companies will think.

This is how they calm the way money is used and
work to suppress excessive price increases.

However, it is
not as simple as saying, ‘If prices go up, interest rates will definitely go up.’

Is the price increase due to rising raw material costs,
or are wages and consumption also increasing?

They make decisions while observing such situations to see if raising interest rates will cool the economy too much.

As someone paying off a mortgage,
you would want interest rates to remain low,
but these adjustments are made with the entire Japanese economy in mind.

And,
something to keep in mind when understanding mortgages is the point that variable interest rates and fixed interest rates are affected by different interest rates.

First, variable interest rates.
This is a system that is easily influenced by the policy interest rate adjusted by the Bank of Japan.

When the Bank of Japan raises the policy interest rate, the burden on banks to collect money also tends to increase.

As a result,
the interest rates at which banks lend are reviewed,
and the rise extends to variable mortgage interest rates,
which is the general flow.

Many banks refer to the short-term prime rate, which is the interest rate for short-term lending to highly creditworthy companies.

It is a difficult name, but
it is easy to understand if you think of it as ‘the Bank of Japan’s decisions being transmitted to mortgages through bank lending rates.’

However,
the timing when this is actually reflected in mortgage repayments varies depending on the bank and the contract details.

Next, fixed interest rates.
These are mainly influenced by long-term interest rates. A typical benchmark is the yield on

10-year government bonds, which is money lent to the government for 10 years.

Long-term interest rates move not only based on the current situation, but also on future outlooks such as
‘prices seem likely to rise’ or ‘interest rates seem likely to become higher in the future.’

Therefore,
fixed mortgage interest rates may rise before the Bank of Japan actually raises rates.

However, for those who have already borrowed at a fixed rate for the entire period, the interest rate will not change even if market interest rates rise, but

for 10-year fixed rates, the interest rate is reviewed after that fixed period ends.
Full-period fixed and fixed-term should be considered separately.

It is impossible to accurately predict the future of interest rates and make plans based on that.

This is not a discussion about what is correct.
You will have to choose the option that you believe is correct, but

Whether you choose a variable interest rate or a fixed interest rate,
it is important to have a solid understanding of how they work.

That concludes our discussion on how interest rates work.
Thank you for your hard work!