Understanding the Impact of Prepayment in Numbers

Mortgage prepayment reduces the interest you would otherwise pay in the future. For example, on a 3,000 man-yen loan at 1.5% interest over 35 years, making a 200 man-yen lump-sum prepayment (term-shortening type) in year five saves roughly 80 man-yen in total interest and shortens the repayment period by about two years. The interest savings from prepayment are effectively equivalent to earning a risk-free return equal to your mortgage rate.

For a balanced perspective, books comparing prepayment and investing lay out rational decision criteria based on interest rate differentials.

On the other hand, investing the same 200 man-yen at 5% annual return for 30 years would grow to approximately 865 man-yen through compounding, yielding about 665 man-yen in investment gains. By the numbers alone, investing appears far more advantageous, but investments carry the risk of losing principal, and a 5% annual return is by no means guaranteed.

The Deciding Factors - Interest Rate Gap and Risk Tolerance

The basic decision criterion is mortgage rate versus expected investment return. If your mortgage rate is 0.5% and the expected return on investments is 5%, the 4.5% spread favors investing. However, if your mortgage rate exceeds 3%, the guaranteed interest savings from prepayment become the more rational choice.

During the period you are receiving the Jutaku Loan Kozo (housing loan tax deduction), there is no rush to prepay. Since 0.7% of the outstanding loan balance is deducted from your income tax, the effective interest burden is even lower. It makes sense to consider prepayment after the deduction period ends.

A Balanced Approach

Rather than an all-or-nothing choice between prepayment and investing, splitting surplus funds between both is a practical option. For example, directing half toward prepayment and the other half into NISA-based index fund contributions lets you pursue both guaranteed interest savings and asset growth. Finding a balance that feels comfortable, including the psychological peace of mind, is what matters most.

books on balancing mortgage and investing explain how to strike the right balance between loan repayment and wealth building.