Key Considerations for Financial Planning When Buying a Condo in Japan 

When you embark on the journey of purchasing a condo, crafting a comprehensive financial plan is pivotal. This plan not only ensures you are well-prepared but also prevents financial pitfalls, especially if you are opting for a mortgage. In this article, we will delve into three essential points to keep in mind when creating a financial strategy for buying a condo.

Points to Note in Financial Planning for the Purchase of a Condo: (1) Miscellaneous Expenses

When formulating your financial plan, the first crucial aspect to consider is the diverse array of costs associated with purchasing a condo. Besides the property price, there are several other expenses that demand your attention, such as:

• Stamp Duty: This is a mandatory expense when finalizing a sales contract. Note that there’s a reduction in stamp duty until March 31, 2024, with varying tax amounts based on the sales price.
• Expenses for Borrowing a Mortgage: This includes administrative fees and guarantee fees, which vary depending on the financial institution.
•  Registration Fee: This involves registration license tax and remuneration fee for judicial scriveners when registering real estate. Again, there’s a reduction until March 31, 2024.
•  Brokerage Fee: Paid to the real estate company handling the transaction, this fee has a capped limit based on the contract price. If the trading value exceeds 4 million yen, the upper limit of the brokerage fee is the amount calculated by the following formula.

Sales price× 3% + 60,000 yen + 10% consumption tax

• Reserve Fund for Repairs (& Maintenance): Commonly known as the “Repair Reserve Fund,” this is essential for covering future repair costs of common areas in condominiums.

Additionally, there might be other costs like moving expenses and furniture purchases. Understanding these expenses thoroughly is imperative in your financial planning process.

Points to Note in Financial Planning for the Purchase of a Condo: (2) Running Costs

Some financial institutions place restrictions on the repayment period and loan amount when granting a mortgage loan for the purchase of an existing condominium.

The mortgage loan review process takes into consideration not only the Buyer’s ability to repay the loan, but also the collateral value of the property.

This is because, in the unlikely event that repayment is delayed, the property will be auctioned to recover the loan amount.

For this reason, when a mortgage is taken out on an existing condominium, the amount that can be borrowed tends to be set lower than for a newly built condominium.

The repayment period may also be limited to the number of years of legal life minus the age of the building.

For example, in the case of a 30-year-old used condominium with a steel-framed reinforced concrete structure and a legal life of 47 years, the standard repayment period for a mortgage loan is 17 years.

What Key Characteristics of Pre-Owned Condominiums Pose Challenges for Mortgage Qualification?

The second crucial factor in your financial plan involves considering the ongoing monthly expenses associated with condo ownership. Apart from the mortgage repayment, you need to account for several running costs, including:

• Property Tax: Levied annually based on the property’s assessed value. The tax rate varies depending on the municipality, but basically it is calculated at 1.4% × property tax assessment value.
• Building Management Fee: Essential for the maintenance and management of condominiums.
• Repair Reserve Fund: Allocated for future repairs in common areas.
• Various Insurance Premiums: Such as fire insurance and earthquake insurance, each with specific annual rates.
• Parking Fee: If you utilize a parking lot in the condo premises

It’s vital to be mindful of these running costs, especially if you are new to mortgage payments. Ensure your monthly repayment amount doesn’t mirror your current rent, allowing room for covering additional expenses. Factor in future life stages’ costs, such as education expenses for children and retirement plans, ensuring your financial plan accommodates these changes. If the age at which you can pay off your mortgage is over 65, you will need to consider your retirement income to determine the amount of repayment. In case you suddenly get sick or your income decreases due to restructuring, you also need to save a contingency fund. Make a financial plan so that you will have 3~6 months’ worth of living expenses left after purchasing a condo.

Points to Note in Financial Planning for the Purchase of a Condo (3) Interest Rate

The third pivotal aspect in your financial planning process is understanding the risks associated with interest rate fluctuations. When opting for a mortgage, deciding between a fixed or variable interest rate is critical. While a lower variable rate might seem attractive, it’s essential to weigh the risks.

Different Interest Rates 

With a fixed interest rate, your debt’s interest rate remains stable throughout the repayment period, offering stability in your financial planning. However, with a variable interest rate, your rate might increase due to periodic reviews, influenced by various market factors.

Variable interest rates are reviewed once every six months. It will fluctuate under the influence of Japan’s policy interest rates, and if Japan banks end monetary easing, interest rates will rise. On the other hand, fixed interest rates are influenced by the yield of government bonds, and interest rates are reviewed monthly.

If you opt for a variable interest rate mortgage, consider the timing of rate rises, the five-year rule for equal principal and interest repayment, and the 125% rule. These rules provide some safeguards, ensuring that even if interest rates rise, your monthly repayment amount won’t surge immediately.

In Summary

In conclusion, this article emphasizes three pivotal points crucial in your financial planning when buying a condo. Being aware of miscellaneous expenses, accounting for running costs, and understanding the implications of interest rate fluctuations are paramount. By considering these aspects diligently, you can create a robust financial plan, ensuring a smooth and secure condo purchase. Refer to this guide as you embark on your condo buying journey, and may it pave the way for a successful home purchase.