Central bank rate hikes pose more risk to mortgage borrowers in Japan than in US

Conventions around residential mortgages vary widely across geographies

In modern society, a home is the biggest purchase most people make in their lifetimes. However, given today’s home prices, people usually take out a loan to buy a home instead of paying all cash.

While borrowing to buy a home is thus something many people experience at least once, international differences in mortgage lending/borrowing conventions, including preferences with respect to not only mortgage rate structures but even self-amortizing versus interest-only loans, are not widely recognized. The most popular interest-rate structure, for example, is the adjustable-rate mortgage (ARM) in Japan but the 30-year fixed-rate mortgage in the US.

A recent Japan Housing Finance Agency (JHFA) survey reported that 72.3% of all JHFA borrowers between October 2022 and March 2023 chose ARMs, 18.3% chose hybrid ARMs (loans that convert from fixed to adjustable rate after the first, e.g., two or five years) and only 9.3% chose fixed-rate mortgages. Of Japan’s stock of residential mortgages outstanding as of March 2022, ARMs accounted for 65.7%, fixed-rate loans for 23.0%, per Ministry of Land, Infrastructure, Transport and Tourism survey data. In the US, 30- and 15-year fixed-rate mortgages respectively account for 85.2% and 10.0% of all outstanding residential mortgages as of year-end 2022 per Federal Housing Finance Agency data. ARMs account for a mere few percent of US residential mortgages.

Central banks throughout much of the world ex Japan and China are currently tightening monetary policy through rate hikes and/or unwinding of QE. However, the international differences in mortgage rate structures’ prevalence discussed above imply that monetary tightening’s impact on households and the real economy through the residential mortgage channel should naturally differ internationally.