It is not difficult for foreigners to purchase real estate in Japan. There are no restrictions on foreigners when purchasing real estate, nor is there any extra tax involved if you are a foreigner.

The question is whether foreigners can take out a bank loan or not. To come straight to the point, they can apply for it if they meet the requirements. Moreover, if they follow the rules after receiving a loan, they will avoid getting into trouble.

This article will explain to foreigners who are interested in taking out a bank loan, the following information:

1. What is a bank loan in Japan?

2. Requirements that foreigners must meet to receive a bank loan in Japan

3. The differences in interest rates between mortgage loans and investment loans

4. Cautionary points that are important to know to get a bank loan

5. Recommended banks for foreigners

1. What is a bank loan in Japan?

In Japan, a loan means borrowing some money from a bank or other financial institutions that you need to pay back in small amounts of money every month eventually. Japanese people use a loan when they want to purchase something too expensive to pay at one time.

There are two types of bank loans in Japan, these are:

(1) Mortgage loans

(2) Investment loans

(1) Mortgage Loan

A mortgage loan is a bank loan particularly for purchasing a new house or a second-hand house (including an apartment and a condominium). The purpose of a mortgage loan is to buy a house for living. This means that you are unable to take out this loan if you seek to get a property for rent or a second house. You can take out a mortgage loan if you want to buy a property for living every day or to replace an old home with a new one.

Features of a mortgage loan in Japan:

✔ You can only contract under your name.

✔ There is usually an age limit for taking it out (e.g., the age at the point of paying off is normally 80 years old)

✔ The maximum amount of a mortgage loan depends on your annual income (generally, it is 7 times as much as your annual income) and the appraised value of a property (a property's worth evaluated by the bank where you are applying for the loan).

✔ The repayment source of a mortgage loan is generally based on your monthly income.

✔ You have to pass a loan qualification to get a mortgage loan. You will be required to give some information such as your annual income, the amount of savings, debt, the length of service years, and so on.

“Flat 35” is one of the most popular mortgage loans in Japan, being sold by the Japan Housing Finance Agency (JHF). The “flat” in Flat 35 means that the interest rate is flat during the repayment period (“35” means that the maximum repayment period is 35 years).

The features of Flat35:

✔ Fixed interest rate from start to end of the repayment

✔ No guarantor required

✔ Multiple menus to respond to your situation (e.g., “Flat 35 S”, “Flat 35 Renovate”)

✔ New Organization Group Credit Life Insurance System operated by the JHF to support your repayment process

The New Organization Group Credit Life Insurance System is a life insurance policy that eliminates the need for repayment of debt to the JHF in the event of the death or disability of the insured. After the event, repayment of the Flat 35 is unnecessary.

(2) Investment Loans

An investment loan is for a person who wants to purchase an investment property. Contrary to a mortgage loan, you cannot be available for an investment loan when buying a home.

Features of an investment loan in Japan:

✔ You can either contract under the name of a company or your name.

✔ Some banks set an age limit for taking it out (e.g., the age at the point of paying off is normally 80 years old).

✔ The maximum amount of a mortgage loan depends on your annual rental income (generally, it is 10-20 times as much as your annual rental income).

✔ The repayment source of an investment loan is based on your monthly rental income.

✔ When getting a loan qualification, your profitability of the property is considered as well as your personal information.

2. Requirements that foreigners must meet to receive a mortgage loan in Japan

If you want to take off a mortgage loan, you must meet the requirements offered by the bank. Here are some requirements which Japanese banks generally offer:

◉　A foreigner who holds a RESIDENCE CARD or Permanent Resident Certificate.

◉　A foreigner who does not hold the card nor the certificate but has a Japanese spouse as a guarantor.

◉　A foreigner who has been working as a full-time/part-time employee at the same company for more than 2 years.

◉　A foreigner who is eligible for group credit life insurance.

◉　A foreigner who is between 20 and 65 years old at the time of application and less than 80 years old at the time of full repayment of the loan.

Although most banks offer these requirements to foreigners wanting to get a mortgage loan, they are different in different banks. For example, SMBC Trust Bank PRESTIA requires just being a "Japanese resident" in that you can apply for a loan without a card or certificate.

3. The differences in interest rates between mortgage loans and investment loans

Banks put an interest rate on their loans respectively. Moreover, the interest rate of mortgage loans is different from the one of investment loans. On the one hand, the average annual interest rate of a mortgage loan is between 0.5-2.0%. On the other hand, the average annual interest rate of an investment loan is between 1.5-4.5%. The latter is normally higher than the former because of the risk of loan default.

Investment loans tend to have high-interest rates and high loan amounts. In addition, there is the risk of falling rental income due to falling rents and high vacancy rates, leading to a default on the loan. For these reasons, the rate of an investment loan is higher than the one of a mortgage loan.

4. Cautionary points that are important to know to get a bank loan

When you decide to get a bank loan, note the following points:

(1) Choose an English-speaking bank

(2) Switch from a housing loan to an investment loan when you rent out the property

(1) Choose an English-speaking bank

If you cannot understand Japanese, you should choose an English-speaking bank. The contract must be written in Japanese (documents written in other languages and interpreters are not allowed). With an English-speaking bank, the person in charge will respond to you in English so that you will be able to know what is written in the contract.

(2) Switch from a mortgage loan to an investment loan when you rent out the property

It is possible that you can rent a property purchased for residential use. In this case, you have to switch your mortgage loan to an investment loan.

You may want to choose an investment loan by considering the interest rate. The amount of repayment will be increased after switching.

Simulation for a 50-million-yen loan repayment after the switching (the pay-back period is 30 years):

*1: The minimum housing loan interest rates of SMBC Trust Bank PRESTIA (Jan. 2023).

*2: The minimum investment property loan interest rates of SMBC Trust bank PRESTIA (Jan. 2023).

At the point of switching from a mortgage to an investment loan, the bank will review the loan qualification based on investment loan criteria. Moreover, the payback period of investment loans is normally shorter than mortgage loans.

The average payback period for a mortgage loan is 35 years, while in an investment loan statutory useful life is applied:

*1: The statutory useful life might vary depending on the thickness of the steel.

5. Recommended banks for foreigners

We recommend you the following banks for getting a bank loan:

(1) SMBC Trust Bank PRESTIA

(2) SBI Shinsei Bank

Both banks are familiar with foreigners and are brought under the jurisdiction of big companies.

Here are some features of the banks (SBI Shinsei Bank is only available for a mortgage loan):

Final Note

We explained how loans are available to purchase/rent a property.

The conditions under which a mortgage loan is available vary from bank to bank, so gathering information in advance will be essential. If you do not speak Japanese, it is useful to choose a bank that speaks English.

If there is a possibility that the property purchased for residential use may be rented out in the future, choose a bank that allows conversion from a mortgage loan to an investment loan. Choosing a bank loan that suits your situation it will make this process go smoothly.