Pair loan vs Cross support loan

[japanlife]

Dear all,

I am now in the process of finalizing a home loan with SMBC for a rather important amount (>100MJPY).

My wife is working too and we have been offered the option of doing a "pair loan" or a "cross support" loan.

Basically the way they explained the difference (and +0.18%) is that with cross support loan, we carry the loan together and if one dies the other one will have nothing else to pay.

With pair loan, we have different amount to pay back based on our financial capacity. If one dies, only remaining to pay is what we were initially requested to pay separately.

Any further advice or comment from the community about which option is better?

I am thinking for example at taxes or unfortunate but eventual separation in the (hopefully) long future.

Thank you advance.

[bostoninvestor]

First off, congratulations for being able to qualify for such a large loan. That is not an easy thing to do and you and your wife must be really dedicated to your careers. Kudos. 



I don’t know your ages, how secure your jobs are, if you have life insurance now, or if either of you have any serious health conditions, which are all relevant to this question. 

You did not mention if you or your spouse have life insurance so I’m going to assume for the sake of this exercise that neither of you do. If you do have life insurance, depending on how much you have, you might not need the cross support loan at all.



However, assuming you don’t have any life insurance, the way I would approach this is to calculate how much the +.018% is in yen terms and then multiply that by 12 months and then multiply that number, by term of your loan (usually 30 or 35 years). In other words, you want to put a concrete yen amount on what that +.018% translates into over the course of the loan.



My next step would then be to contact life insurance companies and see how much term insurance will cost you over whatever the term of your loan is. The reason you would want to compare this is because that is basically what the bank is doing under the cross support loan. They are contacting insurance companies and getting a quote for declining balance term insurance. That is how the bank can offer to “pay off your mortgage” if your spouse dies. They are simply cashing in on their term insurance policy. 



Therefore, you will want to shop around and see if you can get a better deal on that term insurance than the bank got. I’m not familiar with the rates, but if the rate the bank quoted you is roughly in line with the quotes you got, then maybe it would be easier and less hassle just to go with cross support loan than to deal with setting up a new contract with an insurance company and all that paperwork. 



Congrats again on getting such a large loan and good luck with whichever one you choose!

[japanlife]

Hello,

Thank you for your nice words.
You re right, we dont have any life insurance, are healthy with stable jobs.

I also saw the thing from this angle and was wondering if it is worth it or not.
As even if we choose pair loan, if one of us die, the remaining amount to be paid by the other party would still be fine.

I know there is no right or wrong and life will tell us in 10/20 years what would have been the best choice, just trying to figure out the possible consequences.

For me I saw it rather through the angle that pair loan really puts on the paper to which amount we are both entitled to pay back. Even though I know we both have to pay back full amount in the end.
But in case of separation it appears clearly on paper how much we each of us participated to financing the loan.

While with cross support basically I would pay and my wife would give me monney monthly to cover her part.

Not sure this is relevant thinking though.

Also if any of you is knowledgeable about loan, I would be interested to hear your opinion about variable vs fixed rate.

Considering the amount I will borrow, I now plan to have a mix of fixed 10 years (40% of the loan) and variable rate (60% of the loan).

Bank is still confident about variable but considering current situation in Western world with interest rate increasing, I feel more safe to secure part of the loan as fixed.

Any thoughts on this would be much appreciated too.

Thx.

[RetireJapan]

Also if any of you is knowledgeable about loan, I would be interested to hear your opinion about variable vs fixed rate.

Considering the amount I will borrow, I now plan to have a mix of fixed 10 years (40% of the loan) and variable rate (60% of the loan).

Bank is still confident about variable but considering current situation in Western world with interest rate increasing, I feel more safe to secure part of the loan as fixed.

Any thoughts on this would be much appreciated too.

Thx.

I belive the vast majority of borrowers in Japan have variable home loans now. This is because they are cheaper and have been for a while.

Personally I have never seen the attraction of mortgagest that have a fixed rate for a certain duration followed by a floating rate after that. I could understand floating rate first, then fixed later, but no banks seem to offer that

Personally I chose a floating rate for our home loan, but it is much smaller and we could pay it off at any point if circumstances changed.

Had it been larger I might have been more inclined to get a fixed rate.

Have you also looked into a Flat 35 loan? These are fixed for the duration of the loan. The upper limit is 8,000万, but you might be able to put together a cash deposit or another loan for the rest of it.

https://www.flat35.com/loan/flat35/conditions.html

[zeroshiki]

Flat35 is a "last resort" type of loan and is naturally higher than most other stuff.

I don't have a home loan but I've studied it a bit and from what I've seen the fixed + variable is the worst of both worlds in the sense that even if variable rates do shoot up, it won't go up that much during your lock-in period (10 years in this case). In which case, you've paid a higher fixed rate during the period where you know its supposed to be lower, and then when there is more volatility (10+ years from now) you've set yourself up to the variable rate gods. If your concern is volatility then you should go fixed rate. If you believe It can't possibly go that high in 35 years, then variable is the way to go.

[Tony]

If you take out the pair loan, both your wife and you will qualify for the mortgage tax break, as opposed to doing a loan in your name with her support. For a loan that large, a loan just in your name would max out your tax break fairly quickly. However you will also have to pay double the fees for a pair loan, as each of you is getting a loan.

Also are you sure that with the loan just in your name and her support that the loan is nullified if she dies?