Should I pay off my mortgage early in Japan?

• Reasons to pay mortgage early
• Reasons not to pay mortgage early
• Summary
• What we did
• Video explanation

Computer says no

This is a very common question in the RetireJapan forum, when people email me, or in coaching sessions. A lot of advice in English recommends paying mortgages off early, and many people dislike being in debt and aim to be debt (and mortgage) free as soon as possible.

But this is not necessarily the best option in Japan.

Reasons to pay mortgage early

There are some reasons to make extra payments or pay your mortgage off.

The best one may be to get peace of mind. Personal finance is personal, after all, and if having a mortgage stresses you out then you should probably pay it off (as long as you understand all the factors involved).

If you think interest rates will go up in the future you may wish to pay your mortgage off in order to reduce the amount you have to pay in interest. You are basically getting a return of whatever the interest rate you are paying on the mortgage on your money. The higher the interest rate, the greater the return on your ‘investment’.

Another reason is to reduce future expenses. Many people want to pay off their mortgage before they retire, for example, to reduce their monthly expenses once they are retired.

In Japan there are usually no early repayment penalties, so you can easily make extra payments or pay off your mortgage entirely without having to pay a fee.

Reasons not to pay mortgage early

For most people (you need to buy an eligible property) there is a mortgage tax deduction for the first 13 years (previously ten years). This is up to 0.7% of the outstanding loan (previously 1%) and for many people makes a huge difference to their tax bill. As long as you are receiving this tax break it does not make much sense to make early repayments as you will be reducing your deduction.

Most mortgages in Japan come with life insurance: if you die with money still owed on the mortgage, the insurance will pay it off. If you make extra payments or pay off the loan early this benefit will be reduced or eliminated.

Opportunity cost is a big one: what else could you do with the money? If you invested it in the stock market, for example, you might expect an average annual return of up to 8% or so (this is for long-term investing -in the short term the stock market can be volatile and you might see much larger positive or negative movements). Interest rates in Japan are still very low (floating rates are currently well under 0.5%, and fixed rates around 1%) so your effective return from paying the mortgage early could be quite a bit less than you might expect from investing.

Optionality is the last benefit of not making early payments. If you put extra money into repaying your mortgage, that money is gone. There is usually no way of getting it out again, and the bank will not give you credit for it should you run into difficulties later and have trouble making your regular repayments. On the other hand, if you invest the money or keep it in cash to increase your emergency fund, you can choose what to do with it. You can use it to make mortgage payments. You can use it to invest if you see a good opportunity (like a market crash). You can use it for emergencies. You can use it to pay off your mortgage entirely.

Lastly, there are payment protections in Japan for home loans. While interest rates could go up in the future (so far they have not, but this may change), the mortgage repayment amount you have to pay each month is capped, and can only go up slowly. However, the total amount of the outstanding loan can go up even though your monthly payments don’t.

Summary

Pros	Cons
Peace of mind.	Lose mortgage tax deduction benefit.
Avoid risk of high interest rates in future.	Lose any life insurance packaged with the mortgage.
Reduce future expenses.	Opportunity cost – you might get a better return investing the money.
Easy – no early payment fee in Japan.	Optionality – you won’t have the money at hand in case of future need.

What we did

We borrowed 110% of the purchase price of our manshon (the extra 10% was to cover fees and transaction costs) and took out a variable rate mortgage at 0.5% for 30 years. Our mortgage payment was just over 30,000 yen a month.

The manshon we bought was over 25 years old and I was not able to get a certificate of structural integrity, so we did not qualify for the mortgage tax deduction (although I later learned that I probably could have gotten the certificate after all).

For the first couple of years I made extra payments. I liked the idea of being debt free, and it was easy to make extra payments online (with no fee).

However, after a couple of years I thought about it more, and for the reasons above decided not to make any extra payments. The optionality of having the money rather than paying off the loan, the low interest rate (it is still 0.5%), the life insurance if something happens to me, and the higher return I am expecting from investing the money, make it a better option in my eyes.

How about you? Are you planning to pay your mortgage off early? Any questions about this post? Share your experiences and ask for advice on the RetireJapan Forum.