The 'I can afford it' mindset changes in six months. The fear of rising mortgage interest rates
This is a story about a problem that happened recently.
When it came time to sign the contract,
“Wait… at this rate, I can’t buy it.”
That is what happened.
Rising mortgage interest rates
Today, I am writing about something I want to share with those who are thinking of buying a home, based on what actually happened at a real estate company.
*I am not a mortgage expert, so please check with your financial institution regarding specific loan conditions.
At first, they thought, ‘I can afford this amount’
A client consulted with us, saying,
“I want to look for a house with this much of a budget.”
So, the sales representative helped them plan their finances:
How much should the property price be?
How much should be put in as a down payment?
How much should be borrowed as a mortgage?
What will the monthly repayment amount be?
At that point, they said,
“This seems manageable.”
However.
They couldn’t easily find their ideal property, and some time passed.
Then, finally, they found a property they thought,
“This is it!💡´-”
It was finally time to sign the contract.
But,
the mortgage interest rate had risen since the initial financial plan was made.
When we recalculated the monthly repayments with the higher interest rate,
they realized, “I can’t really afford this amount…”😢
The ‘affordable’ from six months ago is not the same as the ‘affordable’ of today.
I thought this was scary.
Often, you don’t find your ideal home as soon as you decide you want one.
If more than six months have passed since you decided to buy a home and made your financial plan.
Before you continue looking for a property, I want you to recalculate once more:
“Is this budget still okay with current interest rates?”
Of course, conditions change not only due to interest rates, but also due to annual income, down payments, other loans, and property prices.
That is precisely why you should check again.
I think this is important.
I find ‘barely affordable’ a bit scary
And one more thing.
When making a financial plan,
I think it is a bit scary to think in terms of the absolute limit of what you can pay each month at current interest rates.
This is because a mortgage is not something you borrow today and finish paying off today.
It is something you pay back over a long period, such as 35 years.
During that time,
interest rates might change.
Your income might change.
Your children’s education expenses might increase.
Your own lives might change as well.
How much does it change when interest rates rise?
For example, with a 50 million yen, 35-year mortgage, if the interest rate rises from 0.5% to 1.0%, a simple calculation of equal principal and interest repayments shows that the monthly repayment amount increases by about 11,000 yen, and the total repayment amount over 35 years differs by about 4.77 million yen.
*Actual mortgages vary depending on the product, repayment method, interest rate review rules, etc.
You might think, “0.5% isn’t that big of a deal, right?”
But when the loan amount is large and the repayment period is long, the difference in interest is by no means small.
Think of a home not in terms of ‘what you can buy,’ but ‘what you can repay without strain’
House hunting often starts with,
“This house is wonderful!”
I understand that.
Once you find your ideal home,
you want it.
But before that,
I want you to think, “Can I maintain this house comfortably for decades to come?”
Interest rates,
living expenses,
education expenses,
maintenance costs.
No one knows what the future holds.
That is why you should have a financial plan with some margin, rather than one that is right on the edge.
And,
recalculate once more after some time has passed.
I really hope you remember this.
I would be happy if this serves as a little reference for those who are about to start looking for a home.
…Even I, who am writing this.
The interest rate on the apartment I bought a few years ago has been slowly creeping up, and lately, I can’t stop my heart from racing.😂
I thought I had bought it with room to spare, but as interest rates rise, I am feeling firsthand that ‘having a margin is indeed important…’