June 22, 2014 2:00 am JST

Housing loan rates falling to record low after sales tax hike

TOKYO -- Japan's housing loan interest rates have been hitting record lows in recent months as the benchmark market interest rate remains at a low level. A drop in home purchases after April's consumption tax hike has added to a race for lower mortgage rates among major banks.

     Sumitomo Mitsui Trust Bank offers two-year fixed prime lending rate at 0.35% a year in June, down 0.05% from the previous month and hitting a new low. In addition, the bank's five-year fixed and 10-year fixed housing loan rates also hit a record low for two consecutive months.

     Similarly, mortgage rates of three major Japanese banks -- Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp. and Mizuho Bank -- are also at their lowest levels.

     Normally, banks review their loan rates for adjustable-rate mortgages every six months. On June 10, Aeon Bank cut its prime lending rate from 0.77% annually to 0.57%, falling below the 0.599% offered by Sony Bank and the lowest rate among major Japanese lenders.

     Japanese banks' fixed and adjustable mortgage rates have been falling steadily since the 2000s. But they have declined further since April this year, making it easier for people to borrow to buy homes. Unless long-term interest rates soar, the rates will likely remain at the lowest levels in July as well.

     Lenders have been scrambling to lower their mortgage rates since the sales tax hike because of a drop in the number of new borrowers. Fewer people are buying condominiums and single-family homes after a surge in demand before the tax hike. The amount of new loans lent by the three major banks fell by 20% on the year in both April and May.

     Since housing loans are a major pillar of loan products for individual consumers, a decline in banks' loan balance could reduce their earnings in the future. As a result, Japanese lenders have to offer better conditions for their lending rates in order to capture shrinking demand and stem the loss of customers.

     Currently, Japan's consumer price inflation exceeds 1% even after discounting the impact of the tax increase. This means that real interest rates are effectively in negative territory.

     Cutting mortgage rates could reduce a loan-deposit interest margin, further cutting into banks' profits.