Japan homebuyers to get clue on higher mortgages after BOJ jolt

HOME hunters in Japan will get an indication on Thursday (Dec 22) about how much more they will have to pay for a popular fixed-rate mortgage after the Bank of Japan (BOJ) surprised markets this week by doubling its yield cap on the 10-year government bond.

Japan Housing Finance (JHF) Agency, a government-backed home-loan financier, is set to decide the coupon on a residential mortgage-backed security (RMBS) that will give some insight of how much more interest homebuyers will have to pay in 2023. The cheapest rate on the agency’s popular 35-year fixed-rate mortgage, which backs the RMBS, had already climbed to 1.65 per cent earlier this month, the highest since 2014, as the BOJ came under pressure to adjust its monetary policy following an unprecedented streak of rate hikes by the US Federal Reserve.

The JHF has helped provide loans for the purchase of at least 1.3 million homes in Japan through its so-called “Flat 35” fixed-rate plan, which is a benchmark for mortgage rates in the nation. Higher interest costs will add to strains on Japanese household purses after consumer prices accelerated by their fastest pace in four decades recently, albeit with inflation still under 4 per cent.

The “Flat 35” mortgage is offered by private financial institutions, which JHF then purchases from lenders, repackages and sells to investors as RMBS.

The spread on JHF’s 35-year RMBS is poised to price at 56 basis points, according to guidance from one of the deal managers Mizuho Securities. That would be the most since the BOJ announced its negative-interest rate policy in January 2016, and 5 basis points higher than last month.

The coupon on the RMBS is a product of the spread over the 10-year Japanese government bond (JGB) and the yield on that note, both of which have been rising this year.

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The BOJ’s decision to double its yield-curve cap on the 10-year JGB to 0.5 per cent from 0.25 per cent will almost certainly push up mortgage interest rates next year, although the relationship between the coupon on JHF’s RMBS and its home-loan interest rate isn’t a simple direct one. BLOOMBERG