What happens to your home loan if your house is destroyed in a natural disaster?

Generally speaking, if your house is destroyed in a disaster you are still on the hook to make your monthly mortgage repayments. However, this year many of Japan’s major banks have started to offer their new borrowers with some respite from their loan payments in the event of a disaster such as an earthquake, typhoon or flooding.

6 ~ 24 months delayed or exempted loan repayments

To cover themselves from the added risk, banks charge either a higher interest rate or a special processing fee at the time of the loan agreement. These additional interest rates can be up to 0.5%, while mortgage repayment exemption terms range from 6 to 24 months. Most banks will only allow this special clause to be added to new loan agreements, while Kansai Urban Bank allows borrowers to add it to existing loans.

Some banks provide delayed repayments, while others provide exempted repayments. Although it is not direct money in the pocket, the tax office classifies exempted mortgage repayments as taxable miscellaneous income and the borrower must report them on their end of year tax filing.

Sumitomo Mitsui Banking Corporation (SMBC) reports that up to 15% of their home loan clients choose this option. Between April and June 2018, Kansai Urban Bank reported a 60% increase in applications from the same period last year.

Japan’s Cabinet Office estimated the average reconstruction cost of a home as a result of the 2011 Tohoku disaster was approximately 25 million Yen. Meanwhile, the average assistance from public funds was around 4 million Yen per household. Victims of such disasters are also hit with other fees such as replacing household items and temporary living expenses. Home insurance can provide some financial payout, but in the event of earthquake damage, the payout is limited to 50% of the insured value and capped at no more than 50 million Yen.

50% exemption

Mizuho Bank and SMBC offer a maximum 50% exemption on the remaining loan balance in the event of earthquake, volcano or tsunami. The special clause requires an additional 0.3 ~ 0.5% on top of the home loan interest rate. This can only apply to the portion of the loan that is attributed to the building itself, not the land as land cannot be insured. The home loan is split into two portions – one for the land and one for the building.

Banks have various criteria that must be met. Most will only allow it on buildings built from January 1, 1982 onwards (the big change to earthquake codes was introduced in 1981).

Terms and conditions vary between banks. For details, please contact the bank directly and be sure to check the fine print.

The Nikkei Keizai Shimbun, September 15, 2018.
Nikkei Style, September 23, 2018.

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