RetireJapan

Posted: **Tue Sep 27, 2022 11:48 pm**

I am in Tokyo where everything is expensive and my mortgage was well above the 50,000,000 balance limit. So I have been making early payments to bring it down, and I think next year my mortgage tax back period ends and I will get close to the full 5,000,000 yen back in total.

I am fixed at 1%, and like the idea of investment producing better returns over the long term, however, by paying back the mortgage early there is guaranteed money to be saved there. I have a mortgage calculator excel sheet from the internet that showed the millions of yen in interest payments that I would save just by paying back the mortgage early. It’s risk free money, sitting there to be taken, whereas with investment, past performance is not a guarantee of future performance.

So my approach is going to be to keep doing both - investment as well as early mortgage repayments.

( I also do those early repayments once or twice a year - it doesn’t make much difference whether you pay back a chunk once a year, or each month, so far as I recall.)

Posted: **Wed Sep 28, 2022 12:35 am**

We paid ours off early, tho we're in the provinces so the total loan/cost was peanuts compared to some places.

The analogy is not correct, but saying a mortgage is good debt (vs cards) is a little like saying that even tho you drink a lot you don't do drugs.

Posted: **Wed Sep 28, 2022 6:10 am**

captainspoke wrote: ↑Wed Sep 28, 2022 12:35 am
The analogy is not correct, but saying a mortgage is good debt (vs cards) is a little like saying that even tho you drink a lot you don't do drugs.

Interesting perspective.

I see it this way, a mortgage is a good debt, because the house payments is equal to the same as rent.It is a must,( unless we are homeless) its a roof over your families head, gives you a sense of pride, and something to sell. If need be! On top of that, when you retire, the mortgage should be payed off, something to pass on( if they so wish), and if sold, raises some cash, but if you are still renting... your still paying rent until you're visiting the bank manager in the sky.
Cards on the other hand is complete dead money, as there is an interest payment on that.
Similar to those car lease things a bad debt.

I like the way you compared to it to drinking but you don't do drugs. I might add another group to these two, that might be analogous to a good drug, we all need medicine at one point or another.
Maybe the medicine, is helpful, allows us to work, makes us feel good, and maybe that is like a HOME. ( if you get my drift)

Posted: **Wed Sep 28, 2022 6:57 am**

Sure, and I do understand the various reasons that a mortgage is a good deal. It wasn't a lot, an old place so no tax deduction, paid off about '98 or so. Water under the bridge.

Some folks in the other thread seem comfortable that their mortgages will extend into retirement, saying that it's okay if you plan for it, and that it's cheaper (and nicer digs) than rent. On the other hand, we're both retired, and it's also nice not having any payment at all.

Posted: **Wed Sep 28, 2022 7:27 am**

Funnily enough, was talking to a bunch of real estate professionals today, and this very topic came up

Other than psychological comfort (which is important) there is no reason to pay off a mortgage early in Japan.

For the first 10-13 years you can get the tax refund.
If you die before paying off the loan it will be cancelled.
If you put your money into paying the loan off early you will no longer have access to the money, if the money is in the bank you can use it.
0.5% in mortgage interest vs. 5-8% or so in annual growth in an index fund means that paying the loan off early will cost you multiples of the loan amount in lost gains over 2-3 decades.

So while it is important to be able to sleep well at night and personal finance decisions are very personal and boil down to psychological comfort, probably worth being aware of the opportunity cost of paying off a mortgage.

Posted: **Wed Sep 28, 2022 7:50 am**

RetireJapan wrote: ↑Wed Sep 28, 2022 7:27 am Other than psychological comfort (which is important) there is no reason to pay off a mortgage early in Japan.

…
0.5% in mortgage interest vs. 5-8% or so in annual growth in an index fund means that paying the loan off early will cost you multiples of the loan amount in lost gains over 2-3 decades.

So I take issue with this.

At least my fixed rate mortgage is at 1.00% (I think I got it at about the bottom or a few months off it), but if on a variable rate mortgage, that interest rate on the mortgage… is variable.
I assume your 0.5% is variable, no?

While the BOJ currently stubbornly remains in the monetary-easing-or-bust mode, a long term mortgage can conceivably see a change in policy and a rise in rates. I’d say the risk of this is increasingly high these days. US mortgage rates have popped up from low levels to 6% or more, I gather.

This sort of thing is why I opted to fix my mortgage interest rate. I disagree with the strategy if one is sitting on a variable rate mortgage… even in Japan the low rate environment could change, and in fact, I would say now that I expect it to.

I do recall something about there being limits (pace) on how much variable rates can be increased… ? but personally I was happier to take the fixed rate of 1% and be certain of it for the (potentially) decades I’d be living with repayments.

Posted: **Wed Sep 28, 2022 8:29 am**

sutebayashi wrote: ↑Wed Sep 28, 2022 7:50 am
RetireJapan wrote: ↑Wed Sep 28, 2022 7:27 am Other than psychological comfort (which is important) there is no reason to pay off a mortgage early in Japan.

…
0.5% in mortgage interest vs. 5-8% or so in annual growth in an index fund means that paying the loan off early will cost you multiples of the loan amount in lost gains over 2-3 decades.
So I take issue with this.

At least my fixed rate mortgage is at 1.00% (I think I got it at about the bottom or a few months off it), but if on a variable rate mortgage, that interest rate on the mortgage… is variable.
I assume your 0.5% is variable, no?

While the BOJ currently stubbornly remains in the monetary-easing-or-bust mode, a long term mortgage can conceivably see a change in policy and a rise in rates. I’d say the risk of this is increasingly high these days. US mortgage rates have popped up from low levels to 6% or more, I gather.

This sort of thing is why I opted to fix my mortgage interest rate. I disagree with the strategy if one is sitting on a variable rate mortgage… even in Japan the low rate environment could change, and in fact, I would say now that I expect it to.

I do recall something about there being limits (pace) on how much variable rates can be increased… ? but personally I was happier to take the fixed rate of 1% and be certain of it for the (potentially) decades I’d be living with repayments.

But we're not discussing fixed vs variable mortgages here -that is a different, also interesting, discussion.

Also important to be clear that we are not comparing paying off the mortgage to not paying off the mortgage and spending the money on drink and women.

We are comparing paying off the mortgage to investing the same money long-term.

In my case, my remaining mortgage is 7.5m yen at 0.5%. If I pay it off tomorrow I will save just under 50,000 yen's worth of interest on the loan per year.

If instead I invest the 7.5m yen for ten years, it is likely that it would grow by around 100%. So after ten years I would have 15m yen. After 20 I would have 30m yen. And so on.

If conditions changed and I wanted to pay off my mortgage, I could do so by selling some of my investments, but would still likely be up on the deal.

Not paying off the mortgage early gives us options. We have access to the money. Once you pay the bank back, you cannot access the value of your home unless you sell it.

Posted: **Wed Sep 28, 2022 9:03 am**

Ok, but perhaps the size of the mortgage need to be considered here?

For you the mortgage is less I assume than your investment portfolio.
For me, my mortgage is still… quite significant.

I think the variable / fixed factor is significant in the consideration too.

Were I on a variable rate on my large mortgage, then paying it off faster would make much more sense than it does to pay off a fixed rate mortgage, because it reduces the risk to rising interest rates (which tend to coincide with falling stock prices)
(switching to fixed is another option, which I opted for from the outset, perhaps given the size of my initial
mortgage.)

Essentially by holding on to a variable rate mortgage, one is implicitly making a bet on interest rates remaining low, and not rising above the rate of return on equities, for the duration of one’s mortgage. If one has a really long term mortgage I guess that works out…. But what if higher interest rates are a coming?

Posted: **Wed Sep 28, 2022 12:17 pm**

sutebayashi wrote: ↑Wed Sep 28, 2022 9:03 am Essentially by holding on to a variable rate mortgage, one is implicitly making a bet on interest rates remaining low, and not rising above the rate of return on equities, for the duration of one’s mortgage. If one has a really long term mortgage I guess that works out…. But what if higher interest rates are a coming?

I think you are muddying this issue by including the variable/fixed element -if you would like to discuss that please start another thread.

I don't think it changes the fundamental argument (although you are right that it would even less sense to pay off a fixed mortgage before you had to).

Basically we are comparing putting money into your mortgage (0.5-1% return) to putting money into something else and still having access to the money (and the flexibility that goes with it).

Even moderate stock market returns would mean you have more money the later you wait to pay off the mortgage. And by extension not paying it off early at all would give you the bigger return. And if you die early having paid off the mortgage your heirs are losing twice the amount you repaid early.

I understand that some people don't like being in debt and it makes them feel better to pay off the mortgage early (and this is a good reason to do so) but I don't see any other argument for doing that.

Posted: **Wed Sep 28, 2022 12:26 pm**

RetireJapan wrote: ↑Wed Sep 28, 2022 12:17 pm...
I understand that some people don't like being in debt and it makes them feel better to pay off the mortgage early (and this is a good reason to do so) but I don't see any other argument for doing that.

For some, the arc of their working life is secure and predictable, and a long (large?) mortgage would seem more like a no-brainer.

For those whose employment outlook is less secure, the feel better aspect might be more important.

Does that sound right?

RetireJapan

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