#15 [FIRE Strategy for Dads in Their 40s] Don't Panic Over Rising Interest Rates! Our Family's Realistic Decision to Prioritize 'Dividend Self-Generation' Over Early Mortgage …

With more opportunities to see news about rising interest rates, I feel that the worry of ‘Should I start making early repayments?’ is becoming a more realistic concern for child-rearing generations carrying home loans.

Our family also received a notice of a change in our home loan interest rate, and there was a moment where we truly felt the increased burden in terms of interest. I sometimes hear from people around us, ‘If you have surplus funds, wouldn’t it be safer to put them toward early repayment to reduce the monthly payment amount or the total payment amount?’

Certainly, early repayment during a phase of rising interest rates is a solid option that can reliably reduce the interest burden.

However, our family sticks to the policy of ‘not making early repayments, and prioritizing the use of available funds for dividend self-generation (reinvestment into high-dividend stocks, covered call ETFs, etc.) and asset management.’

This time, I will talk about the reasons why our family does not choose early repayment even when faced with rising interest rates, and our decision-making rules regarding mental aspects and capital efficiency.

■ The mental cushion provided by the home loan ‘5-year rule and 125% rule’

What many people worry about with the rise in variable interest rates is the point of ‘won’t the monthly repayment amount suddenly jump and put pressure on the household budget?’

The home loan our family uses (variable interest rate, principal and interest equal repayment method) applies the so-called 5-year rule and 125% rule.

This is a mechanism where even if interest rates rise, the monthly repayment amount is fixed for 5 years, and even when recalculated in the 6th year, it will only rise up to 1.25 times the previous repayment amount.

(*Note that the application of this 5-year rule and 125% rule varies depending on the bank and the repayment method (such as equal principal repayment). It is most certain to check the contract details of your own home loan.)

Of course, since the breakdown of the repayment amount (the ratio of principal to interest) changes, there is a possibility that the total future payment amount will increase. However, you can avoid the situation where ‘the repayment amount suddenly increases by tens of thousands of yen from next month, causing household finances to collapse.’

Thanks to this ‘time lag’ of several years, there is no need to rush to make early repayments and reduce the cash on hand, creating mental leeway to calmly continue asset management.

■ ‘Interest reduction through repayment’ vs. ‘Growth power of dividend self-generation’

I think about the decision of whether or not to choose early repayment from the perspective of ‘where will the funds on hand exert more power’ rather than a simple comparison of numbers.

For example, when comparing the effect of reducing the interest burden (a fixed return of about 1-2% per year) and the dividend self-generation engine (dividend yield of about 5-7% per year + compound interest effect through reinvestment), our family made the decision to prioritize the growth power of the latter.

Funds once allocated to early repayment will, naturally, not return to your hands.

In the unlikely event that you suddenly need cash in the future due to a child’s advancement to higher education or changes in household circumstances, there is a risk that even if you have finished paying off the home loan, you will lack liquidity on hand.

On the other hand, if you invest funds into the dividend self-generation engine, it will continue to generate ‘cash flow’ in the form of monthly or periodic dividends. As these dividends grow, you will approach a state where you can offset or cover the home loan repayment itself with the dividends in the future.

■ ‘Liquidity of funds on hand’ that our family values

What we want to avoid most as a child-rearing generation is for the majority of our assets to be fixed in an immovable form called a house, and for the cash on hand (liquidity) to be depleted.

In our household, we maintain a state where we can flexibly respond to environmental changes like rising interest rates by keeping education funds, emergency funds, and investment assets that generate dividends firmly on hand.

Our stance is that if interest rates were to rise significantly beyond our expectations in the future, clearly exceeding our investment returns, we could then consider paying off the loan in one go using the accumulated investment assets and cash on hand.

Our conclusion is that there is no need to rush into early repayment by reducing our cash on hand right now.

Summary: Choosing the Path That Fits Our Family

There is no ‘absolute right answer’ for mortgage repayment strategies.

Choosing early repayment out of a desire to ‘reduce the debt of a mortgage as quickly as possible for peace of mind’ is a perfectly valid strategy, and choosing to ‘prioritize liquidity and the growth of dividend cash flow’ is also a rational path for our family, which is aiming for FIRE.

I feel that what is important is to make the choice that provides the most mental stability, based on our household’s financial structure and our goals for 5 or 10 years from now, rather than being swayed by news or the opinions of others.

I hope this serves as a hint for those who are feeling anxious about news of rising interest rates.

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#7 [FIRE Strategy for a Dad in His 40s] Realizing the Joy of Growing Dividends! The Full Picture of Our Family’s ‘Dividend Management’ and ‘Step-by-Step Buying’ https://note.com/noble_allium862/n/nbf5d105365c0

#0 [FIRE Strategy for a Dad in His 40s] Don’t Give Up on Education Expenses or Loans! The Big Picture of Aiming for FIRE in Our Early 50s Through ‘Two-Account Separation x Dividend Self-Generation’ https://note.com/noble_allium862/n/n2115389bcf66

*This article shares personal experiences and ways of thinking, and does not recommend any specific financial products or repayment methods. Please make your own decisions and take responsibility for your asset management and mortgage repayment plans.