Managing Household Finances in the Era of Rising Mortgage Rates
Recently, there has been a lot of news about rising mortgage interest rates. In particular, the Bank of Japan’s decision to increase rates by 0.5% has raised concerns for those with variable-rate mortgages, as it may lead to higher monthly payments. In this article, I’ll explain how to prepare for the reality of rising rates and share how my family is handling the situation.
1. Impact of Rising Interest Rates
1.1. The Bank of Japan’s Interest Rate Hike and Its Impact
The Bank of Japan raised its policy interest rate by 0.5%, which has affected households with variable-rate mortgages. Major banks have increased base interest rates by about 0.25%, which will apply from April 1, and the new rates are expected to be reflected in mortgage payments starting in July.
1.2. Increase in Mortgage Payments
Let’s take a look at how the rate hike will affect mortgage payments. Here’s an example scenario:
- Loan balance: 30 million yen
- Loan term: 30 years
- Current interest rate: 0.25%
If the interest rate increases by 0.25% (from 0.25% to 0.5%):
- Monthly payment: ¥86,200 → ¥89,300 (+¥3,100/month)
- Annual increase: ¥37,200
If the interest rate increases by 0.5% (from 0.25% to 0.75%):
- Monthly payment: ¥86,200 → ¥92,800 (+¥6,600/month)
- Annual increase: ¥79,200
If the interest rate increases by 1.0% (from 0.25% to 1.25%):
- Monthly payment: ¥86,200 → ¥99,500 (+¥13,300/month)
- Annual increase: ¥159,600
As you can see, even a small increase in the interest rate can significantly impact monthly payments. For those with variable-rate mortgages, these changes can have a big effect, so it’s important to prepare in advance.
2. Key Principles for Managing Household Finances
2.1. Don’t Overestimate the Current Situation
Currently, my family rents, so we aren’t directly affected by rising mortgage interest rates. However, living circumstances can change. For example, if we decide to buy a house in the future, we may need to take out a loan during a period of higher rates. It’s essential to start reviewing our budget and finances now, preparing for possible future changes.
Example:
- For instance, we might review our current rent and living expenses and cut unnecessary spending. We aim to keep our monthly expenses (including rent) below ¥200,000. If we buy a home in the future, we want to be prepared for a situation where monthly payments could increase by ¥100,000 due to rising interest rates.
- Even though we’re renting now, we also set aside an emergency fund covering six months of living expenses, in case of unexpected events like job loss or career changes.
2.2. Increase Your Options
To prepare for future uncertainties, it’s important to diversify income sources and review expenses. If your income is reliant on just one source, you risk financial strain if that income is disrupted. By securing multiple income streams, you can reduce the risks of such disruptions.
Example:
- If you’re relying only on your primary job, consider creating additional income sources, such as through blogging or YouTube. For example, earning an extra ¥30,000 a month from a side hustle can lighten the overall household financial burden.
- In addition to increasing income, it’s important to reduce unnecessary spending. For instance, reviewing subscription services or cutting ¥10,000 off food costs could free up ¥120,000 annually.
By diversifying income sources and cutting unnecessary costs, we can be better prepared for future challenges.
3. Our Family’s Financial Plan
3.1. Using Dividend Income as a Primary Income Source
My family uses dividend income as a main source of revenue. By investing in high-dividend stocks and monthly-distributing mutual funds, we aim to "increase income without increasing labor hours."
3.1.1. Example of Using Dividend Income
- This month’s dividend income: ¥293,624
- Take-home salary as an employee (last month): Approximately ¥250,000
- Expenses: Approximately ¥300,000 (the impact of inflation on household finances is significant).
Since we’re running at a deficit, we use the dividend income to cover the ¥50,000 shortfall, and reinvest the remaining ¥250,000. By continually reinvesting, we aim to grow the dividend income and stabilize our household finances.
4. Reviewing Household Finances and Securing Options
4.1. How to Use Monthly Dividend Income
For example, if monthly dividend income is ¥30,000, here’s how we could allocate it:
- Cover living expenses: Allocate ¥10,000 towards fixed costs such as electricity and communication bills.
- Expand investment: Invest the remaining ¥20,000 in high-dividend stocks or ETFs (e.g., SPYD, VYM).
- Cycle of increasing dividends: By reinvesting ¥240,000 annually, the next year’s dividend income increases, allowing for further reinvestment.
By reinvesting dividend income, we can increase the amount over the long term and stabilize our asset growth.
4.2. Preparing for Uncertainty
To prepare for unexpected situations, we maintain the following options:
- Transitioning to a dual-income household: My wife is currently a stay-at-home mom, but we are considering the option of her working if necessary.
- Side jobs and skill development: I’m expanding my side business (blogging and utilizing my investment knowledge), and my wife is also exploring flexible work options like part-time or remote jobs.
- Reviewing living costs: We review subscription services, cut down on electricity and communication costs, and even consider moving to reduce fixed living expenses.
- Using financial assets: We may temporarily use dividend income or emergency cash to alleviate the burden of rising interest rates, while still maintaining long-term investment goals.
5. Conclusion
Managing household finances means preparing for the future. To adapt to rising interest rates and inflation, it’s crucial to increase your options and continue using a cycle of dividend income reinvestment. By being prepared for the worst-case scenario and maintaining flexibility, we can navigate financial challenges with greater confidence.
5.1. Action Plan
Reviewing household finances and diversifying income sources is essential to preparing for future uncertainties. Even starting small with high-dividend stocks or mutual fund investments can help build long-term financial security. Additionally, preparing for worst-case scenarios, such as starting a side business, can provide a buffer in case of reduced income.
Example:
- To review our finances, we start by investing just ¥5,000 monthly in high-dividend stocks or mutual funds, such as an S&P 500 ETF. By contributing ¥60,000 annually, we can increase our dividend income and stabilize our household finances.
- Additionally, starting a side business, such as blogging, and earning an extra ¥10,000 a month can provide a safety net in case of unexpected income loss.
By implementing these practices, we can ensure stable household management and secure our financial future.
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