Home Loan Pay Down - Don't Do It...
Ax6isB wrote: ↑Fri Jan 19, 2024 5:14 am
For our situation, buying a place accelerated our financial independence plans dramatically. We moved here with a pet and ended up paying a lot in rent to accommodate the pet. When we researched buying an apartment, we found while we’d take on low interest debt, our monthly costs for lodging dropped by over 50% allowing us to save more/pay off mortgage. So for us, it made a lot sense as the interest rates are so low.
Save more, but don't pay off mortgage, as the interest rate is so low...
Invest that money in something that yields a higher return. See here:
https://www.retirejapan.com/forum/viewt ... ief#p34083
If you pay down your loan:
1. You're paying yourself a return on that money equal to the interest rate on your loan - 0.85% - Well it's marginally better than a Japanese Bank Deposit... on a Depreciating Asset in Japan...
2. The outstanding balance is covered by Life Insurance - if you use your money to pay down the loan, and you die, your family will have the house free and clear, but if you put the money into NISA and you die, your family will have the house free and clear AND your NISA Portfolio.
3. If you fall on hard times, the bank will not give you credit for having payed down the loan faster in the past... They will still demand payment, but if you put the money into NISA, in the worst case you will be able to liquidate the NISA to pay the loan payments...
4. If you are receiving the Mortgage Tax Relief on the Outstanding Balance of the Home Loan, probably for the first 10 years, you receive more tax relief if the balance is higher... If you pay down the loan, the outstanding balance goes down, and so the Mortgage Tax Relief based on the outstanding balance deduction goes down...
Don't listen to Dave Ramsey! Not for Home Loan, especially not in Japan @ 0.85% !
Do listen to Dave Ramsey on paying down other High Interest Consumer Debt!
Then,
1. If you have any taxable income:
Open an Individual Defined Contribution Pension Plan - iDECO, (self, wife, eligible dependents over 18) and pay in the maximum you can.
The maximum amount you can pay in will depend on other Pension schemes you are contributing to Tax Free, but you don't have to contribute to the max if you don't want to, or can't afford to.
For company employee, max Y23,000 per month
For Self-Employed, Unemployed, House-Spouse, max Y68,000 per month
For Shigaku Kyousai member, max Y12,000 per month (to increase to Y20,000 per month later this year)
An iDECO Provider can check for you the maximum amount of tax free contributions you would be entitled to make.
These Contributions are Tax Free, but the disbursements will be taxable (at a low tax rate) in Retirement. Tax Free on the way in, taxable on the way out (at a low tax rate).
You will pay the monthly contribution, so if you pay Y23,000 per month you will have paid Y276,000 in one full year. You will then get the Tax Deduction on these contributions (And probably on the Home Loan Payments probably for 10 years...), so you will save the Taxes on this money; Your Marginal Rate of Income Tax and Reconstruction Tax,
(Depending on Tax Band.... 5.105%, 10.21%, 20.42%, 23.483%, 33.693%, 40.84%, or 45.945%... if the contributions fall within a single band...)
and you will get that amount as a Tax Refund in your Year-End Adjustment - Nenmatsu Chosei, or when you file your Tax Return - Kakutei Shinkoku.
Not only that, but you will also see a reduction in the following year in your Residents' Taxes of 10% of the total deductions and the Income-based portion of your Health Insurance Premiums, also maybe about another 10% of the amount of the total deductions...
Check the National Health Insurance - Kokumin Kenko Hoken information for the City or Ward where you live.
2. Open a Nihon Individual Savings Account - NISA Account
So, you should sweep the Tax Refund and another 20% of the Deductions for the Residents' Tax and Health Insurance savings (that are actually now being paid by the government through tax deductions) into a NISA.
NISA is Post Tax Income going in (but in this case the swept funds are all tax free
), and disbursements are completely tax free. Post Tax on the way in, tax free on the way out.
If you use Rakuten and pay contributions by Rakuten Card, you can also get the Cashback on the contributions for additional benefit, and sweep that into NISA as well
Of course, you can pay more into NISA if you want, to the annual maximum and lifetime maximum.
From this year, you can pay in to NISA a maximum total of Y3.6M, consisting Y2.4M for the Growth Portion, and Y1.2M for the Tsumitate Portion (monthly and bonus payments), per year, to a lifetime maximum of Y18M.
Within both iDECO and NISA, it is generally recommended to invest the funds in Low Cost Global Index Funds, such eMaxisSlim Global All-Country... The choice of funds is entirely up to you...
If you want to, you can make contributions as Gifts to your dependents; spouse and children, up to maximum in Total Received Gifts of Y1.1M per year per recipient.
If they are over 18 and have any taxable income, iDECO will reduce or eliminate their income tax and produce a refund of any income taxes withheld through the year.
If they have no taxable income to offset, NISA would be the better choice for them, being tax free on disbursements.
Then, if they receive a tax refund from contributions to their iDECO, they should also sweep that refund into their NISA for maximum benefit...
