The Bank of Japan’s second interest-rate hike in nearly two decades is set to impact millions of personal mortgages, raising borrowing costs for homebuyers for the first time in a generation.

Mitsubishi UFJ Financial Group Inc, Japan’s largest bank, said it plans to increase the short-term prime rate for the first time in 17 years in September following the central bank’s move on Wednesday. Other lenders are expected to follow. About 75% of personal mortgages in Japan are floating-rate loans tied to the short-term prime rate set individually by banks.

The prospect of higher mortgage costs could put a dampener on already-weak household confidence as well as the housing market. Shares of real estate companies fell the most among all industry groups in Tokyo trading on Thursday. For banks, it will boost the profitability of loans.

In contrast with other developed economies, mortgage rates in Japan have fallen over the years as banks competed for more loan business while the central bank persisted with its negative interest-rate policy. Some online banks still advertise rates as low as 0.27%.

Those mortgage rates may have finally bottomed. MUFG said Wednesday its domestic lending unit will lift the short-term prime rate by 0.15 percentage point to 1.625%, effective Sept 2, marking the first increase since 2007.

Personal mortgages are typically calculated using a bank’s base interest rate benchmarked to the short-term prime rate, with a discount depending on the borrower’s creditworthiness. MUFG currently advertises floating mortgage rates as low as 0.345%.

Higher mortgage rates may pressure the housing market. Tokyo has seen a steady increase in prices of newly built condos, boosted by the weak yen, low supply and a shortage of construction workers.

Shares of leading developers Mitsui Fudosan Co and Mitsubishi Estate Co both dropped as much as 9.4%, the biggest intraday decline since 2020.

Still, the impact on existing homeowners is likely to be delayed. Most Japanese banks have rules that monthly mortgage payment amounts can only be adjusted every five years. So while the total interest repayment amount on the mortgage will increase with a higher interest rate, monthly payments will likely remain unchanged for now.

A potential hit to already-weak consumer spending is a worry for analysts. “I don’t expect a large impact from the mortgage rate increase, but there are concerns about the negative influence on consumer confidence,” said Takashi Shiozawa, an executive at MFS Inc, which operates an online mortgage broker.

Bank of Japan Governor Kazuo Ueda said Wednesday that the decision to raise rates was made on the expectation of continued wage increases in Japan. He pointed to the five-year rule for mortgages, saying that many payments might be unchanged during that period, while he expected wages to gain in the meantime.

“The burden could be reduced because wages will rise first, and the mortgage payments after that,” he said.

  - Bloomberg