Question on house loan

[RetireJapan]

I can make extra payments on my loan without penalty.

There is also a limit on how quickly rates can increase. I believe the interest rate can only go up by 25% (of the current interest rate) every five years (or something similar, don't have the documents to hand). This provides a considerable margin of safety given my rate now is 0.5%

[RetireJapan]

And I could pay it off within a few months if I needed to.

[eagleyes]

Yeah then this is very attractive. I am gonna check if the banks still allow such conditions in their new loan contracts.
Thanks.

[eagleyes]

Oh wait I may have write too fast.
The 25% you mentioned is same as the 125% rule? I think your monthly installments do not go over 125% but the breakdown between interest and capital is changed and basically the interests are reimbursed before the capital for most of the part. You still have to pay the capital later on increasing the overall cost of the loan.

http://homeloan-jp.net/hendo-rule/

Is my understanding right?

[RetireJapan]

Great link! Thanks for posting it

I clearly didn't understand that at all. Hmmm.

My thinking is still the same though: we have a very small loan so variable rate kind of makes sense for us. When we were considering a much larger loan I was planning to get a fixed rate just in case.

I suspect that if interest rates get to the point where they make me uncomfortable, the Japanese government will be bankrupt (so interest rates will not be allowed to rise much).

[eagleyes]

Yeah be careful it is a tricky presentation of the rule.
If you have a small loan I guess the risk is acceptable. One option is to then reimburse earlier the capital if someone has the capacity to do so.

[RetireJapan]

Loan is just under 9 million yen remaining, so no worries (monthly repayment is 25,000 principal, 4,000 interest)

[JaviLM]

Our bank (all banks?) also has protection built into the floating rate. It can't go up by more than 25% every five years, so it is much less risky than a true floating rate based on interest rates.

This is very interesting. Let me confirm whether I understood this correctly. This is a screenshot from じぶん銀行's loan simulator:



Their variable loan rate is 0.457%, and the fixed rate for a 30-year loan is 2.12%.

Taking into account the 25% maximum rate increase per 5-year period, that means that for a 30-year loan the interest rate can grown AT MOST:

Years 0-4: 0.457%
Years 5-9: 0.572% (0.457 x 1.25)
Years 10-14: 0.714% (0.572 x 1.25)
Years 15-19: 0.893% (0.714 x 1.25)
Years 20-24: 1.116% (0.893 x 1.25)
Years 25-29: 1.395% (1.116 x 1.25)

Did I get it right, or am I missing something? With this 25% rate increase protection, even in the worst case scenario (interest rates going up consistently for the next 30 years), the rate remains about half the interest rate for a fixed rate loan.

And taking into account the 1% tax refund for the first 25 years, that means that you don't pay any interest for the first 20 years, and only pay 0.116-0.395% in the last 5 to 10 years of the loan.

Is it as good as it sounds, or are there other factors that I failed to take into account?

[RetireJapan]

This is very interesting. Let me confirm whether I understood this correctly.

Sadly I didn't understand it correctly. If you take a look at the excellent link provided by eagleyes a couple of posts ago, you'll see that it is in fact the monthly payments that cannot go up more than 25% every five years. Interest rates can move every six months, and will track the general bank rates.

While this will protect people from surging monthly payments, if interest rates go up a lot while the monthly repayments are capped, there is a danger that you will end up not repaying your loan in full by the end of the term.

Also, the link explains that not all banks offer the 125%/5 year system (it is optional for them).

So unfortunately in Japan variable mortgages are still almost as risky as variable mortgages elsewhere

[ricardo]

Fixed rate.

Peace of mind.

Job done.

Get on with other things.