Tougher times for home loan approvals

This current period of low-interest rate competition is considered an unprecedented point of time in Japan’s history of property finance. But, rather than low interest rates signaling an ease to borrow, banks are becoming increasingly strict over loan approvals.

— Tighter credit checks —

Lawyer and financial planner, Sachiyo Kobayashi, of the Legal Ikebukuro Law Office said they have noticed an increase in the number of clients who want to know why they have been refused home loans.

Consider this example:

Mr. Yamada is a full-time employee in his 30s. He wishes to buy a 25 million Yen secondhand apartment and has saved up 5 million Yen as a downpayment. He was hoping that his preferred bank would finance the rest. The bank’s general rule is that the annual mortgage repayments are within 35% of the borrower’s annual income. Yamada’s annual income of 4 million Yen meant that he met this basic requirement, yet his loan application was rejected for an unknown reason.

Banks are not obligated to provide the reason why the loan was refused. When deciding on a loan application, the bank will not just look at the borrower’s income but will also consider how long the applicant has been working at their current job and the relative stability of their company.

In the case of Mr. Yamada, his frequent job hopping was potentially considered a minus by the bank.

Akihiko Suzuki from Mitsubishi Fudosan Residential’s Contract Consulting Department, said that applicants with a stable work history are in a better position, while approvals to temporary and dispatch workers are becoming increasingly difficult.

Hideyuki Kayashima from Tokyu Livable said that banks are taking greater care than ever before when conducting credit checks on borrowers.

According to the Japan Research Institute, the average earnings of those in their 30s and 40s (considered the ideal borrowing age) is falling, and long-term employment prospects are becoming scarce. This is placing doubt on the repayment ability of potential borrowers.

— Banks are still in the black —

In Japan, home ownership is a deep seated life goal. Earnings in Japan are based on a seniority-type wage system. While current earnings may be low, employees expect their income to increase as they get older. The goal of home-ownership still remains strong despite no longer having the premise of a stable income.

Bank lobbies are full of brochures advertising their home loan products and they seem to be aggressively pursuing home loan contracts. According to Shunsuke Ogino from the Mitsubishi UFJ Bank Retail Division, the low interest rates mean that the revenue received by banks is lower, but this revenue is still higher than what is offered by government bonds.

Industry estimates suggest that the average interest rate on a home loan in Japan is 1.8%. After deducting personnel and fundraising costs, the net interest rate revenue to the banks range from 0.5 to 0.6% per annum, which puts them in the black.

A recent survey by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) found that there were 7.3 million home loans nationwide as of March, 2011, with a total outstanding balance of 123 trillion Yen. While the number of mortgage contracts are being maintained at a high level, the number of loans directed at new borrowers are falling.

— Symbol of deflation —

Although the revenue margins for banks are shrinking, they cannot escape from the price war on interest rates. Yoshinobu Yamada, a senior analyst at Deutsche Bank, said that home loans are becoming commodities like computers and electronics. In the same way that technological advancements have reduced the hurdles and made it easier for new entrants to the marketplace for electronic goods, a similar change is occurring with the standardization of the home loan approval process.

With the promotion of low-interest loans by the former Government Housing Loan Corporation (now called the Japan Housing Finance Agency), the number of banks pushing for loan conversions has increased.

Consumers are now able to easily compare the mortgage rates offered by each bank online, which has only hastened the price war.

Mr. Ogino from Mitsubishi UFJ Bank said that the bank is going to apply stricter criteria for approving mortgages from now on in order to reduce the risk of bad debts. As the rate of irregular employment increases, and an aging population and deflationary environment continues, home loans will not remain in a stable equilibrium and it is possible that banks will eventually put an end to interest rate price wars.

— The history of home loans in Japan  —

A stone monument in Ikeda City commemorating the birthplace of residential development

The history of home loans in Japan dates back over 100 years. At the end of the First Sino-Japanese war, the opportunity for private civilians to develop housing was high. However, financing options were severely limited.

The founder of the Yasuda Zaibatsu, Zenjiro Yasuda, who, coincidentally was the great-grandfather of Yoko Ono, created a housing finance organization in 1896 and mortgages were offered for the first time in Japan.

The founder of Hankyu Group, Ichizo Kobayashi, also began offering property finance. With the development of railroads, Kobayashi could develop residential suburbs that were previously inaccessible.  This development method was referred to as the “Kobayashi Ichizo Model” and was the driving force behind the success of the company.  In 1910, during the time of the residential development of Ikeda City in Osaka, loan repayments were taken from the wages of residents each month.

In the beginning, home loans had an average term of just 10 to 15 years. The 30+ year mortgage did not arrive until the 1970s.

Home loans carry various risks for banks including interest rate fluctuations and risk of default by borrowers. From the outset, banks were very prudent with their lending and would only consider full-time employees of major corporations.

Source: Nikkei, May 12, 2012.

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