[Early Repayment] The reason for “daring not to repay” in an era of rising interest rates. The perspective of a dual-income household with a 46 million yen mortgage

With the Bank of Japan continuing to raise interest rates, headlines like “Mortgage interest rates are rising” and “Will there be additional rate hikes this year or next?” have become a daily occurrence whenever I open the news.

For our household, which carries a mortgage of approximately 46 million yen with a variable interest rate and equal principal repayment, this is by no means someone else’s problem.

Staring at the repayment schedule sent by the bank, my spouse and I have been holding nightly meetings recently.

“If interest rates keep going up, wouldn’t it be safer to use our current savings to pay off the bonus repayment portion all at once?”

“No, but what about the impact on our family’s security if our cash on hand suddenly drops?”

The anxiety of debt versus the fear of letting go of our cash on hand.
Torn between these two, we deliberated day after day.

And the conclusion our family reached was, “We will not make early repayments until the 13th year when the mortgage tax deduction ends.”.

Now that the majority opinion in society is “pay it back quickly if interest rates are rising,” why did our family choose the exact opposite?

Setting aside all emotional arguments, I will share our family’s approach, organized from the perspectives of profit/loss and household financial defense.

The calculation formula for determining profit and loss

When considering early mortgage repayment, many people tend to focus only on “how much the total interest paid will decrease.”

However, using cash on hand for repayment also means giving up the “interest or profit that could have been earned if that cash had been kept on hand.”

In other words, the essence of early repayment is exactly the same as “investing funds safely at the same yield as the mortgage interest rate.”

Therefore, to clarify whether we should make early repayments or keep the cash on hand, our family used the following simple calculation formula.

Profit/Loss Judgment Value = [Investment Yield on Hand (After Tax)] – [Effective Loan Interest Burden (After Tax Deduction)]

If the result of this calculation is “positive,” you will have more money left over by keeping it on hand and using it for savings or investments. Conversely, it is an easy-to-understand formula showing that only when it becomes “negative” is it more profitable to make an early repayment.

Applying our household’s realistic numbers

I will apply our household’s current numbers directly to this calculation formula.

First, the yield on our available funds.

While there is a method of investing all surplus funds into stocks (such as an all-country index fund), stock price movements are difficult to predict during periods of rising interest rates, and there is also currency risk.
Therefore, our household is being cautious and keeping our standby funds in the company’s “general property accumulation savings.”

The interest rate for this general property accumulation savings is structured to rise in approximately 80% correlation with increases in the policy interest rate, and it has recently risen to about 1.05% to 1.20% per annum.
General property accumulation savings have about 20% (more precisely 20.315%) tax deducted from the interest, but even assuming a nominal 1.05% per annum, the net yield after tax deduction remains approximately 0.84% per annum.

Next, the actual interest burden of the mortgage.

Our household’s nominal borrowing interest rate is 0.85% per annum until December 2026 as per the repayment schedule, but it will be raised to 1.10% starting in January 2027.

However, what we must absolutely not forget here is the existence of the “mortgage tax deduction (0.70% annual tax credit).”

Since 0.70% of the year-end balance is returned directly from the government via income tax and residence tax, even if the interest rate rises to 1.10%, the pure interest cost that our household is actually paying out of our own pockets is only an effective 0.40% per annum after subtracting 0.70% from 1.10%.

I will put this into the judgment formula from earlier.

Judgment result = 0.84% – 0.40% = +0.44%

The judgment value has successfully become positive.

This means that a profitable state is maintained where “by not making early repayments and simply leaving the money in our account, about 4,400 yen per 1 million yen remains in our household’s hands every year.”

If we continue the calculation further, as long as the general property accumulation savings follow interest rate hikes with an 80% correlation, this relationship of “it is more profitable to keep it on hand” will not collapse unless the nominal mortgage interest rate reaches a historical ultra-high rate exceeding 2.6%.

The power of the 0.70% tax deduction was a much stronger cushion than we had imagined.

The “3 major risks of early repayment” that are scarier than the numbers

Even just in terms of calculation profit and loss, it is more advantageous to keep the money on hand, but the real reason our household stopped making repayments lies in the realistic pitfalls of protecting our household finances.

1. Complete loss of liquidity on hand (irreversibility)

Once you have made a prepayment to the bank, you cannot withdraw that money again, even if you say, ‘I actually need the money after all, so please give it back!’

Our household has important financial allocations, such as ‘car replacement costs’ coming up in two years and ‘children’s education funds’ that we must absolutely protect for the future.

If you easily wipe out your loan balance just because you have standby funds, your personal defensive funds will become dangerously thin.

If, by any chance, you run out of cash on hand and have to borrow a car loan or similar with an interest rate of 2-4%, the interest you saved on your mortgage will be wiped out in an instant, resulting in a major loss.

② The loss of voluntarily discarding the mortgage tax deduction framework

If you reduce the principal through prepayment, the tax returned to you during the year-end adjustment will directly decrease by that amount.

For example, if you repay 5 million yen, you are voluntarily giving up the right to a tax refund that could have been up to 35,000 yen every year.

③ Reduction of the large-scale coverage known as Group Credit Life Insurance (Danshin)

If your mortgage includes Group Credit Life Insurance, in the event that something happens to me, the remaining loan balance at that time will be reduced to zero.

If you keep cash on hand, you can protect your family with both ‘the remaining cash + the house that is now debt-free,’ but if you repay it prematurely, you are cutting off the coverage framework that was supposed to be wiped out and handing money to the bank instead.

There is no need to go out of your way to give up a state where you are covered by a large life insurance policy at a very low cost of effectively around 0.4% per year.

Which one are you? People who ‘should’ and ‘don’t need to’ make prepayments

Of course, ‘not making prepayments’ is not the right answer for every household. The answer is clearly divided depending on each family’s situation.

People who [should] make prepayments

People who [don’t need to] make prepayments (The preservation camp)

• People who are managing their available funds with a yield of 1% or more per year through general employee savings, fixed deposits, or the new NISA
  for them, “net yield > real interest rate” holds true

• People who have a large, lump-sum expense coming up
  within the next 2 to 3 years, such as buying a car or educational costs; they should prioritize keeping cash on hand to avoid the risk of having to borrow again later

When I applied our household’s situation, we perfectly fit the criteria for “people who don’t need to do it.”

5. Conclusion: Facing it with a “system” rather than emotions

When news of interest rate hikes comes in day after day, you inevitably get hit with impatience and anxiety, thinking, “I have to pay off my debt quickly!” I myself was almost swallowed by that anxiety until I crunched the numbers.

However, household management is not something to face with impatience or emotion; it is a calm, methodical task of laying out the numbers and making stress-free choices.

Our household will not make a single yen of early repayment until the 13th year when the mortgage tax deduction ends, and we will continue to steadily save 220,000 yen automatically each month while keeping our cash on hand robust.

Then, in the 14th year, when the tax deduction period ends and the credit disappears, we will use the funds we have carefully grown to pay off the remaining loan in one lump sum.

This is the blueprint that we, being the timid people we are, arrived at after discussing it day after day—the one that gives us the most peace of mind and the most benefit.

How is your household taking this current phase of interest rate hikes, and what measures are you considering?

If you’d like, please take a moment to think about it while enjoying the pleasant autumn breeze.

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[Disclaimer]
The content of this article is based on the author’s calculations and considerations as part of personal household management, using public data and their own contract details. It does not guarantee future interest rate movements or changes in the tax system. For decisions regarding individual loan transactions or taxes, please consult with your financial institution or a professional.