Don't Panic When Interest Rates Rise! What You Should Never Do with Mortgage Prepayments

With the increasing news about rising interest rates, those of you with mortgages are likely feeling a bit anxious.

Many of you are probably wondering, “Should I make a prepayment now while I can?”

In reality, rushing to make prepayments just because interest rates have risen can actually increase the risks to your household finances.

In this article, I will explain in an easy-to-understand way how to wisely approach your mortgage during a period of rising interest rates and the importance of keeping cash on hand.

Why rising interest rates make us panic

When news about the Bank of Japan’s policy rate hikes or rising mortgage rates becomes a hot topic, many people think, “I have to pay off my debt quickly.”

This is because most people in Japan are not used to rising interest rates, as ultra-low rates have continued for a long time.[[phN_open]][[phN_close]]

However, please take a moment to calm down and think about this.

A mortgage is a special mechanism that allows individuals to borrow a large amount of money at the lowest interest rate in their lives.

If you use all your cash on hand to pay it off just because interest rates have risen slightly, you might end up creating a dangerous situation for yourself.

The “cash disappearance” trap hidden in prepayments

The biggest advantage of prepayments is that you can reduce the interest you would have paid in the future.

While it is certainly a saving in terms of numbers, money once paid toward a loan can never be returned to your hands.

What would happen if you used up most of your savings for a prepayment and then your income decreased due to illness, a sudden injury, or poor company performance?

You would fall into a dire situation where you have a house, but no cash to pay for next month’s living expenses or medical bills.

A house cannot be sold and turned into cash immediately.

It is not your house, but the “cash on hand” that protects you from unforeseen life events.

Mortgage vs. Asset Management! Which is more profitable?

Suppose your mortgage interest rate rises from 0.5% to 1.5%.

Of course, the interest burden will increase, but what if you used the funds you were going to use for that repayment for solid index investments, such as through a new NISA, which can expect an annual return of about 3% to 5%?

There is a strong possibility that the returns gained from asset management will be higher than the interest costs of your mortgage.

Instead of thinking of debt as inherently bad, the secret to efficiently growing your assets is to adopt the perspective of “keeping funds procured at ultra-low interest rates on hand and investing them at a higher yield.”

Have you forgotten about the ultimate insurance, the Group Credit Life Insurance (Danshin)?

Mortgages have a major strength that other loans do not have.

That is the “Group Credit Life Insurance (Danshin).”

If something happens to you while you are repaying the loan, the remaining balance is fully waived, and your family is left with a debt-free home.

If you had forced an extra repayment and reduced your cash on hand by 5 million yen, you would lose the 5 million yen in cash that could have been left behind in the event of an emergency.

If you keep cash on hand, you can pass on both the “house and the remaining cash” to your family in the event of an emergency.

Danshin also functions as a very generous form of life insurance.

Cash on hand and repayment strategies by generation

How you manage your mortgage changes depending on your age and life stage.

30s to 40s (Education and Child-rearing Period)

This is a period when major expenses such as education costs and car replacements will overlap.

It is recommended to refrain from extra repayments as much as possible, secure your cash on hand, and proceed with asset formation through means like the new NISA.

50s (Second Life Preparation Period)

This is a time when child-rearing settles down and retirement begins to come into view.

While calculating the balance between your loan balance at retirement and your retirement allowance, you may consider making repayments little by little if you have surplus cash on hand.

60s and beyond (Retirement and Old Age)

Rising interest rates after entering retirement can be a mental burden.

It is safer to aim for full repayment with surplus funds only after you have sufficiently secured the cash necessary for your living expenses in retirement.

Summary: Don’t be swayed by interest rates; focus on securing your cash reserves.

Hearing news about rising mortgage interest rates makes everyone feel anxious.

However, rushing to make extra payments and depleting your cash on hand is the biggest risk you should avoid.

Keep a solid amount of cash on hand (emergency savings) and invest any surplus to grow your assets.

This is a realistic approach to safely weathering a period of rising interest rates.

Start by checking your household budget balance and your available cash reserves.