Japan regulator steps up scrutiny of 50-year home loans

Japan’s financial regulator is increasing scrutiny of ultralong mortgage lending by online banks and others as the country’s housing market booms, according to a Financial Services Agency official.

Home loans of as long as 50 years are becoming more common among younger borrowers with modest incomes, because they allow smaller repayments to be stretched out over a longer time. The FSA is concerned about the repayment risks if interest rates rise or their incomes fall, the official said, asking not to be identified because the matter is private.

Mortgages in Japan have traditionally been structured with repayment periods of as long as 35 years. But as home prices climb, a growing number of lenders including SBI Shinsei Bank and Rakuten Bank have begun offering loans with terms of four decades or half a century.

The regulator plans to intensify its monitoring and directly engage with banks if necessary, the FSA official said. The agency declined to comment.

Homebuyers who take out a 50-year floating-rate mortgage rather than a conventional home loan face a longer period of exposure to the risk that borrowing costs will rise to levels they can’t manage. The Bank of Japan is expected to keep raising interest rates, which would put pressure on borrowers who determined how much they can afford based on their initially low monthly repayments.

Another risk is the slower pace at which borrowers build equity in their homes. Because a large portion of the loan principal remains outstanding for longer, borrowers are more vulnerable to falling into negative equity if property prices decline, leaving them unable to fully repay the mortgage even after selling the property.

With housing becoming increasingly expensive, the FSA is concerned that products such as 50-year mortgages and so-called pair loans, in which couples borrow jointly to purchase a home, may be allowing some households to take on debt beyond their repayment capacity, the FSA official said.