Buying a House (or How I Envy the Rich)

How I envy the rich and why I think I will never be rich.  Aka: Money Loves Money!

I am an English teacher and one of my students said something profound to me.  “Money loves money!”  We thought for a few minutes and wondered if those words have ever been uttered by anyone with enough prominence to make it a famous quote but we couldn’t think of anyone.  He coined this phrase.

Anyways, I recently started searching for a house.  I got married a year and a half ago.  Just before our wedding we moved in together.  A few months after marriage we started to talk about how good it would be to own our own house.  I have always wanted to buy a house because the idea of paying inflated rent to someone who is most likely living a good life on my dime.

Sidetrack: I think this is where we can see the seeds of money loves money.  Someone wealthy or fortunate enough to own land can rent it out at a value higher than its worth to generate income.  I live in Japan.  Japan has a system call 礼金 or reikin which translates to a few different things but Key Money is the most common term.  I have to give a non-refundable gift to the landlord for the privilege of paying them rent every month.  Reikin histroically has been between 2 and 6 months of rent.  Recently it is slowly fading away but almost all new apartment buildings I see still have it.  Older rooms do not.  I guess the owner wants to recoup some of the initial investment as quickly as possible.

Ok, where was I?  Oh yeah.  I want to buy my own house so I can pay my mortgage to the bank instead of some fat-cat.  Before I started searching for a house I did not have a lot of bad impressions of banks.  In fact banks in Japan seem pretty fair. I can not think of anytime I got hit with an unexpected bank charge, ever.  Paying the bank means that they have more money available to loan to other customers, like me, who would like to buy a house.  A quick google search for banks in Japan to check out interest rates left me feeling mighty happy.  1.6% at a lot of banks.  When I used to “simulation calculator” I was able to find some houses that were easy to afford.  (I was not including things like property tax and maintenance costs but I was aware of them).  Heres what I found, a 35 year mortgage at 1.5% I would pay 81,100 yen a month.  Thats exactly what we pay now so making this payment every month would be a piece of cake.  Off we go.  Drop into the bank.  Fill out a few papers and walk out with a check that I hand over to the real estate agent.  What could be easier?

Ok, I didn’t really think it would be that easy but after consulting with the clerk and filling out dozens of application forms, we were rejected.  It seems like no official reason is given but the clerk explained the deficiencies in our application.  1)  The big one!  I do not have a permanent residency visa.  I will get it after being married for three years.   This seemed to hurt us most at the big banks.  2)  My salary is insufficient.  Even though my wife and I both work, the approval calculations appear to be based mostly on my income.  3)  The other biggie.  (Insignificantly) Small deposit.

Ok.  Here’s where things started to become clear to me.  Money loves money!  The larger your down payment, the better the terms of the loan can be.  The worse the down payment, the higher the interest rate and the lower chance of being approved.  The house we wanted was ¥26,000,000 or $325,000 USD.  Its pretty expensive.  Our reason for choosing it is that it is actually really cheap for the area we would like to live.  This means an area near my wife’s family.  Not affluent by any means.  Just an ordinary city in Japan.  The other big consideration is transportation.  We do not own a car.  We would like to someday but it is truly not necessary for our lives.  All the expenses we would funnel into a car can be funneled into the house instead.  And again, the mortgage payment would be the same as what we pay in rent now so we feel that we can afford it.  With a measly few thousand down, I am a bit surprised now that we were not laughed at.  From more current research and study I have learned that 10-15% of the house cost should be put down.  Thats ¥2,600,000 to ¥5,200,000.   That’s $32,000 – $54,000 US.  I do not think I have ever had that much cash on hand or in my account at one time.  People with that kind of cash on hand can get loans as low as 0.9% over 35 years (in Japan).  People in our situation can get 3.9%.  The difference between 1% and 4% is not so big.  I thought.

¥26,500,000 over 35 years with 0 down.

  • 1.0%   ¥74,800 / month
  • 1.5%   ¥81,100 / month
  • 2.0%   ¥87,800 / month
  • 2.5%   ¥94,700 / month
  • 3.0%   ¥102,000 / month
  • 3.5%   ¥110,600 / month
  • 4.0%   ¥117,300 / month

So someone with a lot of savings, and presumably a lot of money, can pay ¥42,500 less per month than someone who can not “qualify” for the low rate loan.  Thats $532 per month more if you are poor.

At first I wondered how this system works.  How is it practical that someone who will have trouble making payments will need to pay more than someone with more income and can easily make the payments.  Haha!  There is your answer.  Risk!  The wealthier person can make the payments back to the bank with less risk.  The bank can feel comfortable in its investment.  The poorer person / family may struggle at some point to make payments.  If it reaches the point of foreclosure then there is considerable expense to the bank.  Legal fees to process the documents, clean up costs to prepare the house for resale and so on.  The bank is taking more risk lending you the money so they “deserve” a bigger reward.  I got this.  I understand the theory behind the system.

It led me to my next question.  How is it ethical???  I do not have an answer to this.  It seems to me that the bank is making the risk worse by charging more over the term of the loan.  The person paying 1% will only pay a little bit extra then the original price of the house when compared to the poorer person who will be paying nearly double the initial cost of the house over the term of the loan.

This is getting boring.  What’s your point?

I got married a bit late.  I had some health, financial, natural disaster and romantic troubles that took a toll on my life and my bank account.  Saving was a priority for me at one point in time but it hasn’t been recently.  That does not mean that I went on a crazy shopping spree but it means that I was more careless than I should have been.  I am now in my late 30’s so a 35 year mortgage will put my last payment more than 10 years after the retirement age in Japan.  In my mind that means that if I want to buy a house I NEED to buy soon or I will miss my window.  The older I get the shorter the term of the potential mortgage, making the payments higher.  Without a new job that will also be impossible.  At my current savings rate it would take 10 years to get to 20% of the downpayment needed.  Dammit!

My advice to you:

  • Save your money.  It’s that simple.  Put your money in the bank as soon as you get it.It is up to you how much but I think if you can half should be savings.  For every $2 you get, $1 goes straight to the bank.
  • Should I invest?  I do not think it is necessary when you are still dealing with smaller amounts.  My measurement of smaller amount ends at around $5,000.  When you have saved at least 5k you can start to think of investing.  Seek professional advice and never invest all of your savings.  Keep the 5k safe.  After you reach 5k.  Try splitting your income again.  50 spending money for your life.  15 percent goes to savings and 35 goes towards some investments.  Whatever works for you.
  • But I don’t plan to get married.  I have heard this argument.  As I have said may times in this article, Money loves money!  If you have some you will find future negotiations will go smoother.  You can decrease the term of the loan (if you need a loan at all) and with good deposits, you can reduce the interest rates.
  • Do not use credit cards!  Ok.  This one is a little trickier.  Having credit is very important.  Having a credit card is a good way to build good credit but can also be a way to start bad habits.  Use your card wisely.  ALWAYS pay your bill in full every month.  If you do not have the cash to buy it, you can not afford it!  This is very important.
  • Don’t smoke!  This one seems to be headed in a different direction.  As an ex-smoker, I can say that cigarettes may make you feel relieved but the truth is that they cause the stress in the first place.  The increasing price of cigs is not helping either.
  • Don’t drink!  This advice is also pretty controversial.  I was a pretty heavy drinker since my teenage days.  If I could calculate how much I spent on booze in all these years, I would cry.  My house might be bought.  As a university student, I spent about $100 or more per month on booze add that to dinners with friends and hanging out and I have spent more than I am willing to admit.  Those things are good and fun but alcohol is a slippery slope for a lot of people.  I think  it is better safe than sorry.  There is no downside to not drinking.  There are a lot of downsides to getting loaded with your friends.  The more often you do it, the worse you will get.  Trust me!
Thank you for reading this.  I would love some feedback.  What do you agree with?  Disagree with?


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