Why do variable mortgage rates rise when the policy interest rate goes up?
Sometimes you hear on the news that
the Bank of Japan has raised the policy interest rate.
Then, you might hear news saying,
“There is a possibility that variable mortgage rates will rise.”
But what exactly is the relationship between the Bank of Japan and your mortgage?
Actually, there is a bank in between them.
—
① First, let’s briefly understand the “policy interest rate”
Simply put, the policy interest rate is an important rate that the Bank of Japan uses to influence the interest rate environment in the financial market.
When the BOJ raises the policy interest rate,
the financial environment moves in a direction that
“makes the cost of borrowing money in society higher.”
Conversely, when it lowers the policy interest rate,
it moves in a direction that
“makes it easier to borrow money.”
This leads to mortgage loans.
—
② Banks also “borrow money”
This is the most important part.
Banks lend us mortgage loans.
However, banks also raise funds.
In other words,
banks also bear the cost of procuring money.
For example,
a bank procures funds at a relatively low cost
↓
lends those funds to companies or individuals
↓
earns a profit from the difference between the lending interest rate and the procurement cost
This is the business they do.
Therefore, when the interest rate environment in society changes, it also affects the bank’s lending rates.
—
③ What happens when the BOJ raises rates?
Suppose the BOJ raises the policy interest rate.
Then,
Policy interest rate ↑
↓
Affects short-term market interest rates, etc.
↓
The funding and lending environment surrounding banks changes
↓
Affects the benchmark for the bank’s short-term lending rates
↓
Possibility of affecting variable mortgage rates
This is the flow.
In other words,
BOJ → Bank → Mortgage
The influence is transmitted through this route.
—
④ Why are “variable interest rates” easily affected?
Mortgage loans are broadly divided into
fixed interest rates
and
variable interest rates.
As the name suggests, variable interest rates can change.
In Japan, many variable-rate mortgage products have interest rates determined based on the bank’s short-term lending rate benchmarks.
Therefore, when the short-term interest rate environment changes, it can affect variable mortgage rates.
On the other hand, fixed interest rates have the characteristic of being more easily affected by the long-term interest rate environment.
—
⑤ This is where it connects to “long-term interest rates”
Please recall the long-term interest rates we learned about last time.
Long-term interest rates reflect
“market expectations about what will happen to prices, the economy, and interest rates in the future.”
For mortgages, roughly speaking,
Variable interest rate
→ Short-term interest rate environment
Fixed interest rate
→ Long-term interest rate environment
It is easier to understand if you think of them as having a strong relationship with these.
In other words,
“policy interest rate” and “long-term interest rate” are not the same thing.
It is very important not to confuse these.
—
⑥ “If the policy interest rate goes up by 0.25%, does the mortgage rate also go up by 0.25%?”
This is also important.
The answer is,
it does not necessarily rise by the same amount.
Mortgage interest rates are determined by various factors such as:
* Policy interest rate
* Market interest rates
* Bank funding environment
* Each bank’s base rate
* Preferential interest rates
* Competition between financial institutions
* Contract details
Therefore,
Policy interest rate + 0.25%
= Mortgage + 0.25%
cannot be thought of so simply.
—
⑦ So, what happens to mortgage users when interest rates rise?
If variable interest rates rise,
Borrowing rate ↑
↓
Interest paid ↑
↓
Possibility of increased mortgage burden
↓
Possibility of less disposable income for the household
This is the impact.
For example, if the monthly mortgage repayment amount increases,
“Let’s eat out less”
“Let’s hold back on travel a bit”
“Let’s postpone buying new home appliances”
more families might think this way.
Then,
Mortgage → Household → Consumption → Corporate sales → Economy
The impact spreads to this extent.
—
⑧ That is why “interest rates” are an important switch for the economy
Connecting everything so far,
Bank of Japan
↓
Policy interest rate
↓
Affects short-term interest rates, etc.
↓
Affects bank lending environment
↓
Affects variable mortgage rates
↓
Affects household burden
↓
Affects consumption
↓
Affects companies/economy
This is the flow.
In other words,
the news that “the BOJ raised interest rates” is not just about financial institutions.
It is connected to our mortgages and the money we can use every month.
—
Summary | Just remember this
If you want to understand variable mortgage rates, remember the following flow:
Policy interest rate rises
↓
Short-term interest rate environment changes
↓
Affects bank lending rate benchmarks, etc.
↓
Possibility of affecting variable mortgage rates
↓
Affects the burden on mortgage users
However,
“mortgage rates do not rise by the exact same amount as the policy interest rate.”
This is important.
And once you understand this mechanism, the following question naturally arises:
“Then why does the BOJ bother to raise interest rates?”
Actually, one of its biggest goals is
“to curb excessive price increases.”
Next,
if you understand “Why does the BOJ raise rates? | The relationship between interest rates and inflation,”
Policy interest rate → Mortgage → Consumption → Prices → Economy
the big flow of the economy will be complete.