Online banks pivot on low-rate mortgages as funding costs rise

Online banks, long popular with borrowers for offering low mortgage rates, are lifting rates faster than the Bank of Japan as funding costs climb in a revived “world with interest rates.”

PayPay Bank in July raised the benchmark rate for its floating-rate mortgages from 2.93 percent to 3.28 percent per annum after the BOJ increased the policy rate to about 1 percent in June.

The benchmark rate is the base rate before deducting preferential discounts determined by a borrower’s creditworthiness. Each bank sets it using the BOJ’s policy rate as a reference.

PayPay Bank’s move, which came ahead of its peers, drew industry attention because the size of the increase, 0.35 percentage point, was larger than the BOJ’s 0.25 point.

Online banks made similar moves this spring after the BOJ raised the policy rate by 0.25 point in December.

SBI Shinsei Bank, Sony Bank, and Aeon Bank all outpaced the BOJ with 0.35-point increases, while au Jibun Bank’s rate rose by 0.3 point.

In contrast, the three megabanks, such as MUFG Bank, increased rates by 0.25 point.

In the coming months, online banks other than PayPay Bank could also lift rates by more than a quarter percentage point when they reflect the BOJ’s June rate hike.

According to the Mogecheck mortgage comparison and evaluation service, MUFG Bank, Yokohama Bank and Resona Bank led the ranking for the lowest variable rates in August after applying maximum preferential discounts.

In January 2024, online banks SBI Shinsei Bank, PayPay Bank and SBI Sumishin Net Bank dominated the top three slots.

Takahiko Adachi, who heads au Jibun Bank’s mortgage division, said the funding environment for deposits and other capital has completely changed with the BOJ’s pivot away from its massive monetary easing program that started in March 2024.

With the return of a “world with interest rates,” banks have scrambled to secure deposits, a vital source of earnings, intensifying competition to offer higher deposit rates.

Kazunari Ishii of the Daiwa Institute of Research said many online-bank customers tend to be particularly willing to transfer funds to institutions that offer higher deposit rates.

As latecomers without the scale of the megabanks, online banks have relied on attractive interest rates to pull in deposits and need to keep them high to retain customers.

An official at a major bank said the cost of raising funds for online banks is rising particularly sharply.

Online banks have also engaged in fierce competition over mortgages, keeping rates below those of major banks.

That means unless they raise rates more aggressively, their profitability will be squeezed.

Online banks have found themselves with limited capacity to extend further loans after rapidly expanding mortgage balances.

As of the end of June, au Jibun Bank’s loan-to-deposit ratio was 106.3 percent, meaning its outstanding loans exceeded its deposits.

“Until deposits grow, we cannot step any harder on the gas (on expanding mortgage lending),” said Noriaki Maruyama, president of Docomo SMTB Net Bank, whose ratio stood at 94.1 percent.

Maruyama said the end of the BOJ’s ultra-loose monetary policy has changed investment dynamics.

“We can now earn higher yields from investments in government bonds and other market instruments than we can from mortgage lending,” he said. “There is no longer any reason to force ourselves into an excessive interest-rate competition on mortgages.”

Docomo SMTB Net Bank, formerly SBI Sumishin Net Bank, intends to proceed with what Maruyama calls a “normalization” of mortgage rates.

As part of that strategy, the bank in June launched a new mortgage product that can keep monthly repayments significantly lower.

Borrowers repay only 50 percent of the property’s collateral appraisal value over the life of the loan while paying off the remaining half in a lump sum at maturity.

The bank said the mortgage product is the first of its kind among both megabanks and online banks.

It targets newly built and pre-owned apartments priced at 100 million yen ($627,000) or more in prime locations where asset values are unlikely to depreciate, such as Tokyo’s 23 wards.

Maruyama said the strategy reflects soaring housing prices in the Tokyo metropolitan area, where apartments in the 100 million yen range have become commonplace.

“We want to diversify our product offerings in line with the changing times and increase the proportion of mortgages that can compete on more than just interest rates,” he said.