Early repayment of Japanese mortgages

[RetireJapan]

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I understand that some people don't like being in debt and it makes them feel better to pay off the mortgage early (and this is a good reason to do so) but I don't see any other argument for doing that.

For some, the arc of their working life is secure and predictable, and a long (large?) mortgage would seem more like a no-brainer.

For those whose employment outlook is less secure, the feel better aspect might be more important.

Does that sound right?

Not really. If your employment is less secure, it would be better to have the flexibility of access to your money.

You could continue to make your mortgage payments, for example (if you repay your mortgage early and then run into financial difficulties, the bank will not give you credit for those early payments and will expect you to continue making the regular ones).

If your investments have grown you will have more reserves to tide you over.

A very low cost loan is an amazing thing, and by paying it off early one is losing access to it.

I would borrow infinite money at 0.5%, but the bank will only lend it to me against a home. So voluntarily reducing the amount they will lend you doesn't make sense to me, unless not doing so would make you unhappy or stressed (in which case paying off the loan is the correct thing to do for you).

[sutebayashi]

I think you are muddying this issue by including the variable/fixed element -if you would like to discuss that please start another thread.

I don’t mean to muddy it but I do see it as relevant. Will make this my last one.

Even moderate stock market returns would mean you have more money the later you wait to pay off the mortgage.

With a variable rate mortgage, there is a risk of the interest rate increasing. Most would probably take the other side of such a bet here in Japan, but the risk is still there, however low probability one assigns it. (Globally, we can see what has been happening with rates in recent months.)

My point which I think relevant to this topic is, if one has a variable rate mortgage, one therefore has interest rate risk. Early repayments can reduce the size of that interest rate risk.

Like all risks, some choose to accept their risk and some choose to buy insurance. An early repayment approach seems to be a valid risk reduction strategy where variable rate mortgages are concerned. Whether stocks would do better depends on how high interest rates go. My house isn’t likely to burn down… but I have fire insurance anyway.

Sorry if it seems pedantic.

[RetireJapan]

Early repayments can reduce the size of that interest rate risk.

Like all risks, some choose to accept their risk and some choose to buy insurance. An early repayment approach seems to be a valid risk reduction strategy where variable rate mortgages are concerned. Whether stocks would do better depends on how high interest rates go. My house isn’t likely to burn down… but I have fire insurance anyway.

I'm not sure insurance is a good thing to compare it to. With insurance, you are making a tiny payment against a catastrophic loss and if you suffer the catastrophic loss you will be reimbursed in full.

My main point remains that if you invest your extra cash instead of putting it into the mortgage, you gain optionality. You also keep the benefit of the life insurance on the loan.

In the unlikely event that the interest rate on your loan rises enough to become a problem in the future, you can then use the money that you saved/invested to pay the mortgage.

I don't see any benefit to making those payments early when interest rates are low though, other than personal preference/peace of mind.

I'm not saying it is wrong for people to pay their mortgage off early if that would make them happier, but I have yet to hear a good non-psychological reason to do so in Japan.

[taneandy]

In the unlikely event that the interest rate on your loan rises enough to become a problem in the future, you can then use the money that you saved/invested to pay the mortgage.

I guess the counter point would be "what would you do if a sudden interest rate rise coincides with a significant dip in the market and unemployment?"
Quite an extreme scenario, but bad things do tend to occur all at once.
Of course you could save some of the extra money in cash, but then you are missing out on the "better returns" of stocks.

I agree that for most people it will be better to just keep the extra money in investments or a mixture of investments and cash, but I can see the point that it adds an extra dimension of risk, especially if you are on a variable rate. (I guess it also adds a slight risk of your money being stolen or of you going on a sudden spending spree.)

[Bubblegun]

In my case, my remaining mortgage is 7.5m yen at 0.5%. If I pay it off tomorrow I will save just under 50,000 yen's worth of interest on the loan per year.

If instead I invest the 7.5m yen for ten years, it is likely that it would grow by around 100%. So after ten years I would have 15m yen. After 20 I would have 30m yen. And so on.

If conditions changed and I wanted to pay off my mortgage, I could do so by selling some of my investments, but would still likely be up on the deal.

Not paying off the mortgage early gives us options. We have access to the money. Once you pay the bank back, you cannot access the value of your home unless you sell it.

This is my exact reasoning. Initially I was trying to jam as much into my mortgage as possible, beleiving all debt is bad debt, but some debt is an investment or actually a must. it makes sense to take advantage of the tax system if there is a benefit or if interest rates are sooooo low its better to put any excess savings to work and then if need be pay off the home loan.

Ok, but perhaps the size of the mortgage need to be considered here?
. But what if higher interest rates are a coming?

Excellent point. This was one of my biggest motivations on paying that mortgage down. It was £120,000, and I paid it off along with the rent down to £25,000. Right now it seems to have been a good deal, as it seems everyone is panicking in the UK about their mortgages, and nobody saw this in 2008. in fact nobody even thought interest rates would go from 6% down to almost nothing. So if it makes you psychologicaly happy/healthy, I say...pay it down, then when you feel comfortable you can change.

You could continue to make your mortgage payments, for example (if you repay your mortgage early and then run into financial difficulties, the bank will not give you credit for those early payments and will expect you to continue making the regular ones).

I agree with everything. I imagine if you can save a years mortgage emergency fund, that should give someone time if there is an emergency to recover. and provide that big psychological cushion.

Does Japan have payment holidays? incase people do have problems? eg health problems, unemployment.

[Paddy]

Great discussion – good food for thought. 27 years to go on my 35er!

[DragonAsh]

If instead I invest the 7.5m yen for ten years, it is likely that it would grow by around 100%. So after ten years I would have 15m yen. After 20 I would have 30m yen. A

I will bet you a reasonable amount that you will not average 7% in real returns over the next 10 years.

[RetireJapan]

If instead I invest the 7.5m yen for ten years, it is likely that it would grow by around 100%. So after ten years I would have 15m yen. After 20 I would have 30m yen. A

I will bet you a reasonable amount that you will not average 7% in real returns over the next 10 years.

I will not take that bet

But I think I'll get more than 1-2%. And the optionality remains. And the life/cancer insurance on the loan is a wild card.

[Tkydon]

https://www.youtube.com/watch?v=w3z0vVEVT_s