Am I delusional about this home loan?

[Ori]

After finding a land and choosing a builder, I'm getting a cold feet because of the loan.
I wonder what other people think - am I just being excessively frugal and cautious here, or is it really not very wise to take loan like this one?

So, providing that I take Flat 35S(A) loan for 35 yrs with 1.03% initial rate (Rakuten's plan), our monthly loan payments will be exactly 25% of out net income.
This is marginally fine, considering that common advice is that rent/mortgage should be 25-30% of net income. However, considering that our current rent is half of that, I'm feeling a little uncomfortable about this raise. It's not that we can't pay that amount - as I said we are very frugal and have high savings rate - it just feels uncomfortable (like loosing a job will be much more of a problem etc). I'm used to not have to worry about money exactly because I always had a lot saved, but after taking this loan it will have to change.
But that's not even my main concern. What I'm most worried about is the length of the loan. Considering that we are almost forty now, we will have to keep paying well after retiring. And while I plan to work as long as possible, there is no knowing whether I will be able to do so or not. So in the worst case, all my pension will be spent on the loan payments, and we will have to live off the investments and my spouse pension (which will be minimal).

On other hand, at the moment I have enough savings to put 50% of the down payment (I'm not going to do so, though), so in the worst case if I loose a job, we still be able to keep paying off the loan for the time being.
The land's location is good - it's not in Tokyo, but within 1hr from it, close to the station and shinkansen station, good schools. It probably won't raise in price much, but won't loose value as well.
The house we are going to build is not a luxury one, but very good cost-performance wise - good insulation, airtightness, but not overdone and fairly standard wrt other specs. The builder seems to be reasonable and know what they are doing.

I can go with cheaper builder and get a typical Japanese house which will rot in 30 yrs, but it will save less than 1万 in monthly payments, so I'm not sure if there is any point in doing so, considering impact it will have on quality of life and also increased utility bills.
I also could find a cheaper land, but after searching for a few months I already know that anything cheaper will mean a lot of compromising.
In such case I could just buy tateuri and save a lot of headache and money.

Just wondering, what other people think about this.

[regular]

Your writing seems to suggest that your heart is set on doing this. I suggest to follow your heart. Too much rationalizing may cause heartache later.

However, I also suggest putting more for downpayment, say 25%, and to shorten the number of years to 25, if possible. This could be a great investment in enjoyment, forget resale value.

Finally, 1.03% seems high. I put 60% down and got 0.6% rate. You can certainly do better if you put 25% down.

[RetireJapan]

Decisions about whether to buy a home are always subjective, emotional ones. The key is to also be aware of the numbers, so that you avoid needlessly risky ones.

It sounds like you have done your homework. I went with a floating rate loan (currently 0.5%) for 30 years, but for a much smaller amount.

All things being equal, it seems to be better to borrow 100% (or 110%, as we got, to also cover fees) in order to maximise the mortgage tax refund, then pay the loan down after the 10 years (currently 13 I believe) if you want to. Or just invest the difference. Make sure your bank allows you to overpay without penalty.

Anyone else?

[zeroshiki]

Because of the extremely low interest rates, it doesn't really make a lot of sense to pay more upfront other than for peace of mind. My understanding from research is that JP financial planners suggest to minimize the downpayment if you can (even 0), try to live within your means and then pay off your mortgage when you retire regardless of how much is left. Basically, its a reverse downpayment taking advantage of the low interest rates which you can then use to invest your money somewhere else.

The psychological aspect is the only one you need to get over and that's easier said than done.

[JapaneseMike]

Anyone else?

I think it comes down to what each of us need for piece of mind. If you have 300k saved for retirement but 250k outstanding on your house, some people may be uncomfortable with that.

Rationally the investments arw growing at 6or7 pct a year, and your loan is costing you 1%... so there's a lot of merit to the idea of paying the loan as slowly as possible,
maximize the tax break and watch your investment portfolio grow. Then you should have the cash to pay pff the loan at retirement or whenever you choose.

But as others have mentioned the feeling to be 'free from debt' is a powerful emotional one.

From my perspective, if I could have taken 100 or 110pct mortgage i would have, but I needed to give 20pc down, so there we are. It hits my balances and reduces the tax benefits i'll get from the loan, however, my monthly payment will be lower, giving me flexibility to invest more throughout the loan term...


Final thought, given you're in your 40s, and your plan is to retire here, then does the resale value really matter? [Obviously you've got more options to resell later if it goes up significantly, but are you buying tge house so you won't have rent in retirement [my reason] or for some other type of roi?]

[beanhead]

Not delusional. As you said, 25% is not too bad, and is a fairly common percentage to pay in the UK.
You have got to be comfortable with it, though, and it seems as though you may not be...(?)

If you are concerned about worst case scenarios, then adding a bit more to your emergency/cash fund could help.
Also, when you get the mortgage it will include life insurance. The bank will offer optional accident/illness insurance as well to cover the loan payments in the event of something nasty happening. Perhaps this could help you as it would cover at least some of the potential risks (I am not recommending this, just sharing as something to consider).

[Ori]

Your writing seems to suggest that your heart is set on doing this. I suggest to follow your heart. Too much rationalizing may cause heartache later.

However, I also suggest putting more for downpayment, say 25%, and to shorten the number of years to 25, if possible. This could be a great investment in enjoyment, forget resale value.

Finally, 1.03% seems high. I put 60% down and got 0.6% rate. You can certainly do better if you put 25% down.

Thanks to everyone for replies!
Building this house is definitely something I want, but isn't that the reason of many financial mistakes? Tricking yourself into thinking that you can afford something, while your really can't. I'm pretty sure that ladies who spend more than their monthly salary on LV bags also follow their hearts...
However, judging by the lack of critical responses, I can probably assume that other people don't think that this loan is way too reckless.

Wrt to downpayment, as other people have mentioned, I'd prefer to keep the money invested for a time being. However, I think that I'll follow zeroshiki advice and start paying off the loan early as I'm nearing the retirement (though, I think they give this advice in Japan largely because of the expected huge taishokukin, which is not going to happen where I work ).

I went with a floating rate loan (currently 0.5%) for 30 years, but for a much smaller amount.

If I remember correctly you were incredibly lucky and got your mansion for peanuts, so yeah, your situation is different.
If I manage to get a fixed loan for 0.9-1.1%, I won't event think about the variable rate. It's seems like too much risk for too little benefit, considering the loan amount and duration. By the way, can't say thanks enough for this forum, because this is where I've learned that 125％ rule is bullshit. Before that I was set on getting a variable rate.

Final thought, given you're in your 40s, and your plan is to retire here, then does the resale value really matter? [Obviously you've got more options to resell later if it goes up significantly, but are you buying tge house so you won't have rent in retirement [my reason] or for some other type of roi?]

Well, as they say - expect the best, prepare for the worst. I plan to live in that house till the end, but life happens. I can totally imagine myself getting a dementia or whatever and having to sell the house and move to a facility.

[Ori]

Not delusional. As you said, 25% is not too bad, and is a fairly common percentage to pay in the UK.
You have got to be comfortable with it, though, and it seems as though you may not be...(?)

If you are concerned about worst case scenarios, then adding a bit more to your emergency/cash fund could help.
Also, when you get the mortgage it will include life insurance. The bank will offer optional accident/illness insurance as well to cover the loan payments in the event of something nasty happening. Perhaps this could help you as it would cover at least some of the potential risks (I am not recommending this, just sharing as something to consider).

Thank you for the reply.
I'm glad that other people don't think that it is too reckless.
You are right, I don't feel comfortable about 25% percent, but I guess I have to get to.
And thanks for reminding about the emergency fund! I totally need to double that, especially considering the addition to the family.

Wrt to insurance it's a tricky one. Obviously, life insurance is necessary. But illnesses/accidents, considering that one have a large emergency fund and investment portfolio?.. I've never had any insurance besides the employer's one, so will have have to think long and hard about this.

[mighty58]

Your situation sounds a lot like what I went through. I ended up buying a place a bit outside Tokyo a couple years ago, which took my housing spend up to 25% of my net pay. I am (was) a couple years older than you, and also got a 35 year loan, fixed rate. I even got a 120% loan (including renovation costs). I put zero down because, like you, although I had the money to cover a significant portion of the cost, I preferred to leave it untouched in investments. And I too was uncomfortable with the fact that I'd be on the hook for a relatively large chunk of change every year even after I retired.

There are a few factors that I thought of that could mitigate the worries, as below. Some of these might just be me telling myself not to worry, but:

• I too focused on a property that I believed would hold its value (or at least lose less) than others. As such, selling in the future is a potential exit plan to recoup money to pay off the loan. This being Japan, I am unlikely to make money off a sale, but I figure I shouldn't lose too much either.
• Savings... I don't want to use my retirement funds to pay my mortgage any more than I assume you do, but it does serve as a backstop just in case (having the piece of mind of knowing you won't face a foreclosure)
• Insurance: I got the 7大保険 on my mortgage, which bumped up my interest rate 0.2%, but if I ever get cancer or something during the course of the mortgage (something I rate at somewhere around a 10-20% chance), it's paid off immediately. Also, if I die, my family will inherit it and it will be paid off.
• Inflation: 35 years is a long time, and hopefully we'll see some inflation that erodes the value of the payment. It can only go up, right? Right?! Well, it might be a long shot, but who knows... it could very well happen.
• Use the taishoku-kin: I'm a salaryman, and therefore am entitled to some taishokukin. The amount will depend on my retirement date, but this will not be an insignificant amount of money, and I'm not factoring it into my retirement plans. As such, that money could go straight to the mortgage and I won't feel a loss otherwise.
• Increased income: Whether through promotions or expat stints or job hopping, the potential to increase income over the remainder of my career is real. If I can do that and maintain spending levels, which shouldn't be too hard, I can build more of a nest egg to take care of the mortgage.
• Finally, we liked the house we found. A lot. We looked at a lot of places, many of which were shitboxes, and decided we didn't want the typical build or to compromise too much on location (see point #1), even though we could have easily bought some random place to live for half the price.

[Ori]

mighty58, thanks for the reply. Indeed your situation is similar to mine, with exception that our company doesn't pay taishokukin and we are building a new house, so it will loose much more value that yours (I expect the land to retain the value, and it's roughly half of the whole loan amount).
We initially wanted to find a used house too, but as you fairly noted most of them were shitboxes, and those which weren't were failing other requirements like location, school district etc. You must have been very lucky to find the house you like.
And actually, buying decent used house wasn't much cheaper than building a new one, considering bigger commission, renovation costs and less tax benefits (not sure about the last one, though). Of course, it also depends on the choice of a house maker, because used house from someone like Sweden house could easily cost more than a new custom house from local builder, who also builds passive(ish) houses.

I almost persuaded myself to go through with the loan with the following thinking:
1) If we were to rent a house/apartment of the comparable quality, the rent wouldn't be cheaper than the loan (though, we would never dare to rent anything so expensive).
2) In the worst case, if we find in retirement that paying off the loan is too difficult, we could sell it at least for the half of costs (provided the land retains it value) and move somewhere cheaper.

However, your comment about insurance made me doubting this loan again. The thing is, although I'm going to be a sole borrower, we are going to pay it off together with my spouse, who cannot (I think) be a co-borrower due to an unstable income, work history, employment type and such. And that means that only I am going to be insured. So if something happens with my spouse and we will have to pay off the loan only from my income, it will much tougher (close to 30% of my net income, not to mention that I will have to cover all other expenses by myself as well). As a countermeasure, my spouse could get a life insurance, I guess...

By the way, your loan conditions sounds very good. You say you've got 7大 for only +0.2%, while Rakuten, which is my top runner at the moment, offers only 3大 for the same +0.2%. Do you mind me asking were and what kind of loan did you get?