Sweet spot for loan amount

[Ulf Hausen]

Hey guys,
First of all, sorry for the weird English, as this is not my first language.

We will be buying our first mansion in the near future.
Currently we are pondering how much of a loan we should take out.

Here are the numbers (everything in Man):
Savings 2500+
Cost for the object 3500
Including the realtor's 3%, moving, some minor remodeling, etc. we assume the cost to be around 3800.
Is this a reasonable assumption?

My annual salary is 500, my wife's a freelancer with a variable income, so I will take the loan on my own.
Our current idea is to take a loan of 1500, so we would have a bit over 4000, which would let us pay for acquisition, moving, etc. and have some reserve. I know having a house loan would reduce my tax burden, but I haven't found any information on how much that would actually be or if the object we buy would even qualify for that. Is there any official source on this, which is not written in legal Japanese?

Also, about paying back the loan. As my wife's income is variable, we could be able to pay back chunks of the loan every now and then instead of waiting for the whole xx years to pass. Does this make sense?
Or would I lose tax benefits? would it better to invest the money instead short to mid-term?

Thanks already for your helpful answers in advance!

[RetireJapan]

Welcome! Great question. Generally I recommend borrowing 3850 and saving/investing your savings. You will get a mortgage tax break and interest rates are still extremely low in Japan.

[Beaglehound]

Ben's advice is financially sound but personally I wouldn't/didn't take it in its entirety as I am psychologically allergic to debt. I don't think it's a bad decision if a smaller loan makes you more comfortable. Though I do think you might want to leave yourself a decent safety net in cash rather than putting almost everything into the mansion as your figures imply.

[Tkydon]

Do you have PR? If you do, it will make getting a loan much easier.

The bank will take into account your salary as a regular employee, but will probably not include your wife's freelance income in the approval process... but you can ask...

You can put the property in joint names in proportion to the actual contributions to the down-payment and monthly payments/costs. Anything different may open you up to Gift Tax liability for the party contributing less than their share...

I would personally suggest you to get the biggest loan you can secure with the bank, provided that you can Comfortably afford the payments: interest payment on outstanding balance, principle repayment, AND don't forget the Manson Monthly Management Fee AND the quarterly Fixed Asset Tax - Kotei Shisan Zei.

If you put your savings into the property, you are effectively paying yourself the Mortgage Interest Rate as the rate of return on your investment, where you can probably do better by investing that money elsewhere. You get the following benefits for maximizing the loan:

1. (repeat) You're paying yourself a return on that money equal to the interest rate on your loan - Well it's marginally better than a Japanese Bank Deposit... You can probably get much better return elsewhere...

2. The outstanding balance is covered by Life Insurance - if you use your money to pay a large down payment, and you die, your family will have the house free and clear, but if you put the money into other investment, including iDECO and NISA and others, and you die, your family will have the house free and clear AND your Portfolio.

3. If you fall on hard times, the bank will not give you credit for having payed a large down payment or paying down the loan faster in the past... They will still demand payment, but if you invest the money elsewhere, in the worst case you will be able to liquidate the investments to pay the loan payments...

4. If you are receiving the Mortgage Tax Relief for the first 10 years, you receive more tax relief if the balance is higher...
Depending on the property and if the property qualifies, the Tax relief will probably be for 8 years, and will be based on deducting 1% of the outstanding loan balance from your Taxable Income, giving you a tax break for approximately 100 basis points of you loan interest... (Could be more than your loan interest rate if it is below 1%...)
If you pay a larger down payment and reduce the size of the loan, the outstanding balance will be lower, and so the Mortgage Tax Relief based on the 1% of the outstanding loan balance at the end of each year goes down...
You can always refinance at the end of the Tax Relief period, if it turns out to be beneficial to do so, or you can then consider paying down the loan if you really want to (I can see no reason to do so).

Don't listen to Dave Ramsey! Not for Home Loan in Japan
Do listen to Dave Ramsey on paying down other High Interest Consumer Debt!

https://www.youtube.com/shorts/l6RTTshiDsw

https://www.youtube.com/watch?v=w3z0vVEVT_s&t=66s

https://www.youtube.com/watch?v=J2ZC9ZBZA3s

[sutebayashi]

First of all, sorry for the weird English, as this is not my first language.

You are doing great. (I could do nothing outside English and Japanese.)

If you are comfortable paying back the type of monthly repayments that a 100% loan would require of you, and you can get a low interest rate, then I’d agree to go as high as you can get, and invest your savings instead - assuming you are familiar with investing for the long term and that is comfortable for you, even if your investments temporarily make a big decline, which could happen… but probably not over a horizon of 10+ years.

For the house loan tax deduction, the real estate agent you are dealing with should be able to tell you what the property would qualify for. It depends on the property what deduction you can get.

we could be able to pay back chunks of the loan every now and then instead of waiting for the whole xx years to pass. Does this make sense?

Worst option would be to not make early repayments and save the yen in the bank. Very low interest to be earned on a bank deposit, and pay the full interest over the term of the loan.

Second worst option would be to make those early repayments as you say. You would at least reduce the amount of interest you pay on your loan this way, which is better than nothing, as in the first option. A mortgage calculation worksheet should help you find out how much in interest early repayments would save you in interest.

The “best” option is to invest the savings for the long term and make a higher return than the interest rate on the loan.

However, it depends on how long you plan to own the property, too. If you don’t intend to own the property for more than 10 years, then early repayments will make more sense, in my opinion. (But do some investing for your long term future too.)

Or would I lose tax benefits?

You can maximize any tax benefit by not making early repayments for the period that you qualify for a tax deduction. But in turn you pay more interest by not making early repayments…

would it better to invest the money instead short to mid-term?

In the short to mid term, depending on what you invest in, you may see the value of those investments go down, and wished you had made early loan repayments instead.

The good news is, you can decide to change strategy as time passes. I was originally paying off my mortgage faster because it was going past my desired retirement age, and doing so was a guaranteed return on the money, but my salary increased as years went by, and now I prefer to invest my extra money.