Primary Residence Borrowing - Bank’s in Japan Part 1

by Adam German - Housing Japan | REthinktokyo

Upwards of 9 out of 10 deals usually have buyer financing involved and knowing how much a bank will lend you is first and foremost before you start looking at property. 

Imagine this; after months of looking at property, you find one that matches your needs the best.  At that point you start engaging a lender to borrow the funds you need to purchase the property. 

This takes time in Japan and actually when you submit your purchase application, the application must state that you require financing or wish o purchase all cash.  In the case you require financing then seller’s agents wish to see some evidence that you have pre-approval on the specific property you’re applying for before they will engage the seller; without the pre-approval then the purchase application is seen as a waste of time from the seller’s point of view. 

This is one difference between Japan and other markets; for pre-approval, the borrower must submit their personal documentation to the bank as well as information about the specific property you wish to purchase.  Only then will you receive official pre-approval that will allow to submit a purchase application that will lead to a negotiation. 

Some lenders will meet with you and give you a verbal, rough and ready estimate on how much you’ll be able to borrow based on your income statements and tax return filings.  This will be non-comital from the bank’s point of view however it does serve as an accurate guideline for what the bank will allow you to borrow. 

Other lenders wish to have a specific property you are interested in purchasing even before they say any amount.   This is true mainly for tier 1 banks; the Mizuhos, SMBC and UFJ’s of Japan and this is where a real estate can assist. 

Us real estate agents have a pretty good handle on how the bank’s think and we can extrapolate from your yearly earnings how much we think the bank will offer for pre-approval.  So, what you do is provide the documentation the bank needs to your realtor and from that the agent can provide sample property documentation to the bank in order to get a pre-approval letter giving you a fairly accurate idea of how much the bank will lend. 

What’s a sample property?  This is a property that your agent picks that is currently on the market that would match closest to what you can afford based on estimated borrowing amount and other criteria like how many bedrooms you want, size requirements and similar location.

Your realtor will submit your documents and the sample property documents to the banks together with a loan application that is non-obligatory, meaning you obliged to take a loan on the sample property.  The bank will then look at all the documentation and usually within 3 working days come back with a fixed number you would be able to borrow for the sample property. 

Then your realtor says to the bank unfortunately while we were waiting for the bank to pre-approve, someone else has come in and made an offer to the seller and the deal is moving to contract so this property is out of play.

However, at this stage then, using your sample property you have received a very accurate amount of what the bank is willing to lend to you.  With that information then you can start investing time looking at properties in earnest knowing how much you can borrow.

So, generally how much can you borrow?  For primary residences, the banks are usually comfortable with lending 6-7 times gross annual income as a maximum borrowable amount up to their maximum lending ratio.  For example, if you wish to borrow as much as possible on a 100 million yen property and the bank has a maximum borrowable amount of 80% property value, then you are allowed to borrow up to 80 million as long as that figure is within 6-7 times your annual gross income.  100% financing is possible for foreign people however it usually requires a permanent residency visa for Japan and / or marriage to a Japanese national.   

So thats the borrowing amount and next is loan term.  Usually, for primary residences, the loan term is a maximum of 35 years however there are a couple of conditions with this; the borrower must be younger than 80 years old by the end of the last payment of the loan or the structural portion of the property must be under a certain age.  What age structurally depends on the bank and also the specific location of the building and which bank you are speaking to but the age of the borrower limitation is universal across the lending industry.

Next is interest rates; Japan currently has the lowest lending rates in the developed world with 35 year loans on offer to qualified borrowers for anywhere between 0.8 - 1.2%.  The variation is the spread between variable and fixed term rates with fixed term being higher and variable being on the lower end of the spread. 

One thing about Japan’s lending environment that is very beneficial to the borrower is that tier 1 bank financing repayment is usually structured where you, the borrower is paying down the principle from day one.  The scheduled repayment plan once you obtain the loan will be the same monthly payment for 35 years but the breakdown between interest and principle payments month to month will change over the course of the loan.

For example, imagine you borrow an amount from the bank and the monthly repayments are 100,000 yen per month.  At the beginning of the loan, ¥85,000 yen per month is principle repayment and ¥15,000 per month is interest.  

However, over time, since there is less and less principle, then the interest paid in real yen will reduce and the breakdown of the monthly ¥100,000 repayment will look more like ¥90,000 per month principle repayments and ¥10,000 per month interest payments. 

By the time you get 30 years into a 35 year loan, almost all repayments for about the last 5 years are completely principle repayments. 

This differs greatly from interest only financing that can be found in other countries and actually, the Japanese way of doing this is much better for the customer as you’re paying down principle from day one. 

So, all good right?  Let’s talk about some things that could derail your loan application.  The most common one we see is other loans previously on a borrower’s income tax filings.  If you have other, previous debt then, depending on the amount you owe, this will effect how much your can borrow for your own home. 

This is much more a problem for people living in Japan as most financing options are available only if one lives here but this is especially an issue you have no money down yen loans on your book.  That debt tends to be much more than the borrower can afford and if another bank sees you have that kind of debt, they will outright refuse to lend you any more money. 

Other than that, there aren’t many other reasons why your loan would be outright refused; more often than not what ends up happening is the bank will only offer to lend you what they think you can afford which might not match what you were expecting to borrow for the property.  

The reasons for this might be because of age or maybe your annual income is not high enough to warrant a borrow that high for example.  One thing to note; bank’s rarely justify why they came to the number that they are offering; the terms are offered as a take it or leave it proposition.  Sometimes you will receive an explanation but not always. 

So, what does the bank look at in terms of income?  If you are applying for a loan with a Japanese bank in Japan, then they are only interested in evaluating you on your Japan based income that you are paying taxes on.  For example, if you are employed in Japan earning 10 million annually but have a side job graphic designing for companies all over the world that earns you an extra 2 million of pocket money, you can only add that extra 2 million if you are claiming it as income on your Japan based taxable income. 

If you are leaving the funds in your PayPal account or being paid via a bank account in your home country and not claiming the extra 2 million here in Japan then the bank will only evaluate you on your Japan based 10 million yen income. 

That’s pretty much the 360 for primary home loans here in Japan.  If you google Yen Loan Calculator than the top organic search result should be our Housing Japan yen loan calculator where you can plug in various values to get a fairly accurate estimate of what monthly repayments would look like for any borrowed amount and interest rate.  

When our page opens, be sure to scroll down to see links to various lenders offering Yen loans to residents of Japan and other select countries.

The moral of the story:  Get a number on how much you can borrow prior to jumping into a property search in earnest; a little hard work now pays off later in a big way.