When it comes to the question of either buying or renting property, the trends can vary across different countries or socio-economic gradients. Arguably the most common factors that influence these trends are real estate costs in relation to average earnings, and the ease with which one can obtain a loan.
Here in Japan, the general trend is to buy in rural areas, and a mixture of renting and buying in urban and metropolitan areas. Perhaps a similar pattern can be seen in many other developed countries as well due to higher costs associated with urban areas.
Being that it’s probably the most expensive purchase most people will make in their lifetime, it stands to reason that the vast majority won’t have that kind of cash lying around, and will therefore have to take out a loan.
Putting the pros and cons of taking on a loan aside, and assuming most people would get a home-loan if they could, banks and other financial institutions use a variety of criteria to gauge your ability to pay back the loan.
Shain vs. Jieigyou – Full-time employee vs. Freelance
Because home-loans generally stretch out over 30 to 35 years, lenders have to look at and assess the borrower’s long-term ability to meet the monthly payments. This is where the difference between shain and jiei come into play.
It comes as no surprise that full-time employees (shain) command higher trust when compared to freelancers (jiei) due to the volatility associated with freelance work. In many cases this “preferential treatment” occurs irrespective of their actual earnings.
This is not to say that if a freelancer can produce several continuous years (generally 3 or more) of adequately high earnings, that lenders won’t take that into account. They do. But let’s just say that if they had to pick one, with all other things being equal, they would no doubt pick the company-man.
Tips for a Smooth Loan Application
– The more down-payment, the better. 10% of the loan is ideal. This often gets you a lower interest rate as well.
– Pay off all outstanding debts and loans prior to application.
– Generate as high an income as possible for at least 2 or 3 years prior to loan application. This is AFTER-expense or net income. Bear in mind that banks will generally not lend you more than 7 times your mean annual net income for the previous 2 or 3 years.
Timing – in Relation to Taxes
The timing of the move to your new home/registration can make a difference as well. Here in Japan we have a home-loan tax-reduction regime that is calculated based on the amount of principle you have left at the end of each year (December 31st).
Income taxes are filed between February 15th and March 15th each year for the income earned between January 1st and December 31st of the previous year. You can file for the home-loan reduction for a given year provided you moved in and completed all relevant paperwork by December 31st of that year.
This means that if you miss that December 31st deadline and say, move in by January 5th, you’ll have to wait until the following year’s tax filing period – roughly 14 months away. You not only miss the opportunity to reduce your tax burden for that year, but as your loan principle goes down (granted, at a snail’s pace for the first several/many years), so does the allowable tax reduction.
So just how much of a tax reduction are we talking about here?
The home-loan tax reduction amounts to 1% of the remaining loan-principle at the end of December every year for the first 10 years of the loan, with the combined cap being 4 million yen (the sum-total of reduced taxes over the 10 years).
Let’s take a 20 million yen loan as an example:
For the first year, 1% would be 200,000 yen. You can now subtract this 200,000 yen from your income tax. Any remainder can be subtracted from your municipal tax as well. However, any remainder after this will be forfeit and cannot be carried over to the next year. You can repeat this for the next 9 tax reports.
So as you can see, it’s not a deduction from your taxable income, but a direct reduction of the income tax itself.
There is of course a list of (very reasonable) conditions that must be met in order to qualify for this reduction:
– Your after-expense annual income does not exceed 30 million yen.
– The loan period spans at least 10 years. 5 years for “barrier-free” or “Low-energy” homes.
– The home or home-addition in question has a floor area of at least 50m2.
– You, the borrower, must reside in the home. It’s not enough to simply have your name on the title deed as the owner.
– The house must be built according to the post-Hanshin earthquake building code. Generally speaking, any house that was built commercially after 1995 is built to this code. However, the cap is 20 years for wooden houses and 25 years for RC structures.
– If reform, the reform cost must equal 1 million yen or more.
Yes, I know what you’re thinking. “Why didn’t I buy a house sooner goddammit??”
It’s not uncommon for the monthly payment on a loan to be equal to or even less than the rent you’ve been paying for years. Of course, there are other factors involved – monthly payments, whether rent or loan, are not the only thing to consider. Location, personal lifestyle, present and future ambitions for example, are things that can complicate this decision.
But it’s certainly something to consider for folks who “have all their ducks in a row” if you know what I mean.