Why Taking Out a Mortgage is More Advantageous Even When You Have the Cash
The decision to buy a home is one of the most significant financial commitments most people will make in their lives. Naturally, many people assume that paying for a home in cash is the best way to avoid debt and the burden of interest payments. However, in many cases, taking out a mortgage—especially in today’s ultra-low interest rate environment—can be a smarter financial choice, even for those who have enough cash to buy a property outright.
In this blog, we’ll explore why taking out a mortgage can be more advantageous than paying for a home in cash, and discuss how home loans in Japan can offer a variety of benefits, from tax deductions to financial security.
1. The Case for Taking Out a Mortgage
A. The Flexibility and Security of a Mortgage
One of the most compelling reasons to take out a mortgage, even if you have enough cash to buy the home, is the security and flexibility it provides. By using a mortgage, you don’t have to deplete your cash reserves. Having liquidity on hand provides financial flexibility, allowing you to handle unexpected expenses, invest in other opportunities, or maintain a cash buffer for peace of mind.
For example, if you use all of your cash to buy a home outright, you may not have enough left for emergencies or future investments. Having liquidity gives you options for both your present and future, ensuring you won’t be cash-strapped when other financial needs arise.
B. Leveraging Low Interest Rates
Japan has been in a low-interest-rate environment for many years. As of the time this blog is being written, mortgage interest rates in Japan are incredibly low—sometimes as low as 0.5% to 1.5%. This means that the cost of borrowing money for a home is relatively inexpensive, making it more financially sensible to take out a loan than to tie up all your cash in a single purchase.
With such low interest rates, the cost of borrowing is minimal compared to the potential financial benefits of keeping your cash invested elsewhere. In many cases, the returns you could earn by investing your cash (in stocks, bonds, or other investment vehicles) would far exceed the interest you pay on the mortgage, resulting in a net financial gain.
C. Mortgage Interest as a Tax-Deductible Expense
In Japan, the government offers a variety of incentives for homebuyers, especially those using a mortgage. One of the most significant is the 住宅ローン減税 (housing loan tax deduction). This deduction allows homeowners to reduce their income taxes by a certain percentage of their outstanding mortgage balance each year.
For example, you can deduct 1% of your outstanding mortgage balance from your taxes for up to 13 years, depending on the conditions of the loan and the property. For a homebuyer with a ¥30 million mortgage, this could mean savings of hundreds of thousands of yen per year, adding up to millions of yen over the life of the mortgage.
Moreover, in addition to mortgage tax deductions, there are other government incentives such as:
Fixed asset tax reduction for new homes (up to three years).
Sumai Kyufu Kin (housing subsidy), a cash grant of up to ¥500,000 depending on income and other criteria.
Gift tax exemptions for funds gifted for purchasing a home, which can be up to ¥30 million.
D. The Benefit of Group Credit Life Insurance (団体信用生命保険)
When you take out a mortgage in Japan, you are often required to enroll in 団体信用生命保険 (group credit life insurance, or "DanShin"), which offers peace of mind. Should the borrower pass away or suffer a serious illness during the term of the mortgage, the outstanding balance will be paid off by the insurance, leaving the family with no financial burden.
This kind of security is particularly valuable for homeowners who have dependents. It ensures that, in the event of an unfortunate life event, your family won’t be left with the financial responsibility of repaying the loan. When you pay for a home in cash, you forgo this built-in insurance protection, which can lead to greater financial risk for your loved ones.
2. How to Maximize the Benefits of a Mortgage
A. Use Surplus Cash for Down Payments or Prepayments
If you have a significant amount of cash available, you don’t need to sink it all into buying the property. Instead, you can use some of your cash as a down payment to reduce the overall loan amount. This will lower your monthly payments and the total interest paid over the life of the loan. At the same time, you’ll still benefit from the liquidity and flexibility of keeping some of your cash for other uses.
Additionally, if your financial situation improves or you find yourself with extra savings, you can opt for 繰り上げ返済 (prepayment) to reduce your outstanding mortgage balance early. Prepayment allows you to shorten the term of your loan or lower your monthly payments, reducing the interest you’ll have to pay. Since you can choose when and how much to prepay, it provides flexibility in managing your finances.
B. Invest Your Cash for Higher Returns
Instead of using all your cash to buy a home outright, you could invest it in other financial products, such as mutual funds, stocks, or bonds. These investments have the potential to generate higher returns than the low mortgage interest rates. For example, a diversified investment portfolio could generate annual returns of 3% to 6%, while the interest rate on your mortgage may be as low as 0.5% to 1.5%.
By keeping your money invested, you can potentially grow your wealth while simultaneously enjoying the benefits of homeownership through a mortgage. In this way, your cash can continue working for you, rather than being locked away in the home.
C. Plan for Strategic Prepayment After the Tax Benefits Expire
The 住宅ローン減税 (housing loan tax deduction) provides significant savings for up to 13 years, but once this period expires, it may make sense to start prepaying the loan more aggressively. By making lump-sum payments after the tax benefits have ended, you can shorten the loan term or reduce the overall interest burden, allowing you to pay off the mortgage faster without sacrificing the earlier tax savings.
3. The Downsides of Buying a Home with Cash
A. Loss of Liquidity
One of the biggest risks of paying for a home in cash is the loss of liquidity. If you use all your cash to buy a home, you may find yourself in a situation where you don’t have enough liquid assets to cover other expenses. This could be problematic if unexpected financial needs arise, such as medical emergencies, educational expenses, or significant home repairs.
In contrast, taking out a mortgage allows you to preserve your cash for emergencies, investments, or future financial goals. It provides a buffer that can help you manage your finances more effectively over the long term.
B. Missed Tax Benefits
By paying in cash, you forgo the various tax benefits associated with taking out a mortgage, such as the housing loan tax deduction, which could save you millions of yen over the life of the loan. Additionally, you would miss out on government subsidies and other financial incentives designed to reduce the burden of homeownership.
For instance, using a mortgage to buy a ¥30 million home with a 1.2% interest rate could result in tax deductions of approximately ¥2.8 million over 10 years. Paying in cash means that you lose out on this significant saving, which could have helped offset some of the cost of the property.
C. Psychological and Financial Pressure
When you purchase a home outright with cash, there is the risk of becoming financially strained afterward. Particularly for young families or individuals in their 30s or 40s, the years ahead often come with major financial responsibilities, such as children’s education, medical expenses, or career changes. Draining your cash reserves could leave you vulnerable to financial stress during these critical times.
A mortgage, on the other hand, spreads out the financial commitment over a long period, allowing for a more manageable payment structure that doesn’t overextend your financial resources.
4. Conclusion: Why a Mortgage is the Smarter Choice
In today’s low-interest-rate environment, taking out a mortgage can be a smarter financial choice than paying for a home in cash. By leveraging low mortgage rates, you can preserve your cash for other investments, maximize tax benefits, and enjoy the peace of mind that comes with insurance coverage through group credit life insurance. Additionally, with the flexibility to prepay the loan or adjust your payment schedule based on your financial situation, you have greater control over your finances.
Rather than viewing a mortgage as a burden, think of it as a tool that allows you to achieve homeownership without sacrificing liquidity, investment potential, or financial security. With the right strategy, a mortgage can help you grow your wealth while enjoying the benefits of your new home.
In the end, the decision comes down to your personal financial situation and long-term goals. However, for most people, the advantages of taking out a mortgage in Japan far outweigh the benefits of paying for a home in cash. By making the most of tax breaks, low interest rates, and the flexibility of a mortgage, you can secure your financial future while enjoying the stability of homeownership.
