How much house can I afford?

[crew]

There are a lot of information on what the loan companies will loan you, but not much information on just how much you SHOULD be spending for a house in Japan. I am assuming all the "general rules" for the US market would not be accurate for the Japan setting, with the vastly different loan rates etc. So, how do I know how much I should spend for a house and lot (or mansion)? Is it as simple as how much I can set aside for mortgage per month, and assume that I will be in the same situation for 35 years? Any general rules out there?

[RetireJapan]

Hi crew

Welcome to the forum!

There are a lot of information on what the loan companies will loan you, but not much information on just how much you SHOULD be spending for a house in Japan. I am assuming all the "general rules" for the US market would not be accurate for the Japan setting, with the vastly different loan rates etc. So, how do I know how much I should spend for a house and lot (or mansion)? Is it as simple as how much I can set aside for mortgage per month, and assume that I will be in the same situation for 35 years? Any general rules out there?

A mortgage is definitely one of the large, fixed expenses so from a cashflow point of view the smaller it is the better

Especially in Japan, selling a house can be expensive in terms of fees and resale value, so ideally if you are planning to buy a house you will also be planning to live in it for at least 20-30 years.

It's also worth figuring out the total cost of ownership (taxes, insurance, maintenance, etc.) for comparison purposes.

I'm not sure rules of thumb are very useful here. My mortgage plus costs of ownership comes to about 20% of my income, and about 8% of our family income, but we bought a cheap older manshon.

It should definitely be an amount you will be happy to pay for the lifetime of the mortgage.

Not sure how helpful that is. Anyone else?

[crew]

Thanks! Been a long time lurker in the blog!

I'm not sure rules of thumb are very useful here. My mortgage plus costs of ownership comes to about 20% of my income, and about 8% of our family income, but we bought a cheap older manshon.

It should definitely be an amount you will be happy to pay for the lifetime of the mortgage.

Not sure how helpful that is. Anyone else?

By this you mean 20% of your monthly income? And if joined with the total family income, is about 8%? So for a 2-income earner household you would recommend 8% of joint income?

Im looking either at a house or a large mansion, the latter is very limited on the market though. If I am buying second hand, I plan to buy cheap and spend the money on the renovation. However, as much as I read about Japanese not wanting to buy second hand homes, prices are still pretty much up there!

[RetireJapan]

By this you mean 20% of your monthly income? And if joined with the total family income, is about 8%? So for a 2-income earner household you would recommend 8% of joint income?

The lower the better, but your situation may well be different from ours. Under 10% of income on housing expenses is very low. It makes our budget very flexible

[sutebayashi]

Together my wife and I stumped up with more than 35% of our total land + house price, mortgaging the remainder. Our housing guy said that we were relatively ‘sugoi’.

Then I refinanced the mortgage at 1.0% a year later, knocking the monthly repayment down nicely. I am still paying more than 30% of my monthly after tax income in repayment now, and feels more comfortable. My wife’s income is not involved.

I think a higher percentage like this is ok, if you absolute income is large enough, it depends on your overall budget. Someone on the minimum wage with the same percentage would be in trouble

[crew]

Thanks. 30% was something I was thinking off the bat as a good rate, though I admit, it is based on nothing but my own brain with no basis. What makes me curious is that we are currently renting, and if we purchase a house for around say, 40,000,000 yen 0% down, 35 years mortgage, we end up paying just over 100,000 a month, or even lower than our rent. Of course there are the added costs vs rent, but hey, you own the land and house!

So I am looking at it thinking, hey, we can "afford" a 40,000,000 house if we just shell out 100,000 a month (much lower than 30% I am willing to set aside), but it can't be that simple I guess.

[sutebayashi]

I am reading this book called 一生モノのファイナンス written by the CEO of Morningstar japan, and he has a section about just this topic, buying versus renting. Unfortunately I haven’t read that section yet, but I already bought my house

Another book I remember reading before buying was 家を買ったほうが得！ by a 藤川太.
As I recall, the take away was that from a financial perspective, renting is usually better.
I bought (built) anyway because I was not thinking about this from a financial perspective so much as a consumptive perspective - I wanted a certain type of abode.

Besides the monthly repayment, there are other costs like kotei shisan zei that come with owning a house, and unlike with renting, you have to save money yourself to cover eventual breakdowns and needs to renovate etc.

We were married 7 or 8 years before we finally got around to buying though. If you do buy I think it is money down the drain unless you get a good second hand deal, so take your time to make sure you are getting what you really want. The good thing with renting was that I had lived in four or five different places before building, and through that had learned the features of the abode most critical to me.

These days in winter the sun goes low across the sky, but still streams in our windows from dawn until mid afternoon when the sky is clear. We can even sit outside for lunch in the middle of winter, so long as it is not windy! These are the things that are nice about having bought, and getting what you really want above all else. Who cares if this is a money loser

[RetireJapan]

I bought (built) anyway because I was not thinking about this from a financial perspective so much as a consumptive perspective - I wanted a certain type of abode.

These days in winter the sun goes low across the sky, but still streams in our windows from dawn until mid afternoon when the sky is clear. We can even sit outside for lunch in the middle of winter, so long as it is not windy! These are the things that are nice about having bought, and getting what you really want above all else. Who cares if this is a money loser

I think that is very true. Most people are thinking about their comfort, or their family. And that is a good thing.

Buying a house is certainly not just a financial decision, but it is so important to make sure you understand the finances involved before committing. More than in many countries, it can be horrendously expensive to try and reverse a real estate purchase in Japan

[DragonAsh]

Another book I remember reading before buying was 家を買ったほうが得！ by a 藤川太.
As I recall, the take away was that from a financial perspective, renting is usually better.

That would be a counter-intuitive take-away given the title of the book!

One common rule of thumb I've heard is the mortgage should be 25% or less of your take-home pay on a 15-year fixed.
If you can't reach that, you either need to save up for a larger down payment or find a cheaper area to live.

Zero yen down and 35-year mortgage sure wouldn't appeal to me even assuming you could 'invest the difference'.

[RetireJapan]

For people buying an eligible property, the tax deduction for the first ten years means it might be worth borrowing as much as possible (with smaller deposit) for as long as possible (so the monthly payments are smaller) in order to maximise the tax deduction. Make sure you keep the excess money you saved on the deposit and montly payments safe, then after ten years pay down (or pay off) the mortgage.

Sadly I wasn't able to do this (property is too old), but might be worth considering.