Bonus-Barai: The Risks of Bonus Mortgage Payments in Japan

Note: This content is specific to the Japanese employment system.

In Japan, full-time employees traditionally receive large bonuses twice a year (Summer and Winter). Banks offer a mortgage feature called Bonus-Barai (the "Bonus Combined Payment"), available on home loans such as Flat 35 and bank loans, allowing you to allocate up to 50% of your total loan principal to be paid exclusively during bonus months. Many people set it up to keep monthly payments low. However, bank clerks won't tell you this, but it is also "a mechanism to make you pay more interest."

What is Bonus-Barai?

Example:

• Jan-May: Pay ¥80,000.
• June (Bonus): Pay ¥80,000 + ¥300,000.
• Jul-Nov: Pay ¥80,000.
• Dec (Bonus): Pay ¥80,000 + ¥300,000.

This system can be beneficial for those who receive substantial bonuses, as it allows them to make significant payments towards their mortgage during these periods.

The Advantage

It significantly lowers your monthly cash outflow, making expensive homes feel "affordable" on a monthly basis. For instance, if you were to pay ¥380,000 per month without the Bonus-Barai system, you could potentially reduce your monthly payments to ¥80,000 by allocating ¥300,000 towards your mortgage during the bonus months. This can be particularly helpful for families or individuals with tight budgets, as it allows them to allocate their regular income towards living expenses and other necessities.

The Danger

Bonuses are not guaranteed. In a recession, companies cut bonuses first. If your bonus is cut to zero, the bank still demands that ¥300,000 payment: loan repayments won't wait. This is a common cause of mortgage default in Japan. Furthermore, if you are reliant on your bonuses to make these large payments, you may find yourself in a difficult financial situation if your bonus is reduced or eliminated.

Risks of Bonus-Barai

Some of the risks associated with Bonus-Barai include:

• Reduced bonuses: If your bonus is reduced, you may struggle to make the large payments during the bonus months.
• Job loss: If you lose your job, you may no longer receive bonuses, making it difficult to make the large payments.
• Interest rate changes: If interest rates rise, your monthly payments may increase, making it even more challenging to make the large payments during the bonus months.
• Lack of emergency funds: If you are allocating a large portion of your income towards your mortgage during the bonus months, you may not have sufficient emergency funds to cover unexpected expenses.

The Hidden Problem: Six Months Without Principal Reduction

Let's consider how bonus payments work. If you set, for example, 30% of the loan amount as the bonus payment portion, that 30% principal is only repaid once every six months. If you repay diligently every month, the principal decreases little by little every month, and the interest for the next month also decreases. But for the bonus payment portion, interest continues to accrue for 6 months without the principal decreasing at all.

Invisible Costs

Even with the same 30 million yen, 35-year, 1.5% interest loan:

• Case of Monthly Payment Only
• Case of Bonus Payment Combined

When simulated, the bonus payment combined option often results in total interest payments being tens of thousands to over a hundred thousand yen higher.

Understanding the Impact on Your Mortgage

To illustrate the difference, consider a 30 million yen loan with a 35-year term and an interest rate of 1.5%. If you opt for the bonus payment combined option, you might pay around 120,000 yen per month, with an additional 200,000 yen paid twice a year as bonus payments. In contrast, if you choose the monthly payment only option, your monthly payment would be around 130,000 yen, but you would have the flexibility to make extra payments when you receive your bonuses.

Recommendation

Avoid Bonus-Barai if possible. Base your affordability on your regular monthly salary alone. This will help you avoid the risks associated with relying on bonuses to make large payments towards your mortgage. Instead, consider making smaller, regular payments towards your mortgage, and use any bonus payments as extra payments towards your principal.

The Solution: Monthly Payments and "Self-Bonus Payment"

A safer and lower-cost strategy is:

1. Make the loan contract "Monthly Payment Only".
2. When a bonus is paid, manually perform a "Term Reduction Prepayment" each time.

This allows you to avoid the risk of years when bonuses are not paid, and significantly reduce the principal only when you have surplus funds.

Simulation on Amorti

Let's visualize the "invisible costs".

1. Open AmortiApp.
2. Enter your current loan balance.
3. Use the Extra Payments feature to enter the amount equivalent to the bonus month (e.g., 200,000 yen) twice a year.
4. Check how much the term is shortened and interest is reduced.

Rather than mandatory bonus payments in the contract, prepayments made at your own timing give you control over your life. Design without relying on bonus payments.

How to Make the Most of Your Bonuses

When you receive your bonuses, consider making extra payments towards your loan. This can help reduce the principal and interest paid over the life of the loan. You can use the Extra Payments feature on AmortiApp to simulate the impact of these extra payments and see how much you can save.

Alternative Strategies

Some alternative strategies to consider include:

• Making bi-weekly payments: Instead of making one large payment per month, consider making bi-weekly payments. This can help you pay off your mortgage faster and reduce the amount of interest you pay over the life of the loan.
• Making extra payments: Consider making extra payments towards your mortgage principal whenever possible. This can help you pay off your mortgage faster and reduce the amount of interest you pay over the life of the loan.
• Using a mortgage calculator: Utilize a mortgage calculator to determine how much you can afford to borrow and what your monthly payments will be. This can help you make informed decisions about your mortgage and avoid the risks associated with Bonus-Barai.

Common Mistakes to Avoid

• Not reviewing your loan contract carefully to understand the implications of bonus payments.
• Not considering the risk of bonus cuts and how they may impact your ability to make loan payments.
• Not taking advantage of the flexibility offered by monthly payments only to make extra payments when you receive your bonuses.

Conclusion

While the Bonus-Barai system can be beneficial for those who receive substantial bonuses, it is essential to carefully consider the risks. The bonus payment trap can cost you thousands of yen in unnecessary interest payments over the life of your loan. By understanding the potential dangers, exploring alternative strategies and simulating different payment strategies with AmortiApp, you can make informed decisions about your mortgage, take control of your finances and avoid financial difficulties.

👉 Japanese Mortgage Calculator

Key Takeaways

• Bonus-Barai can lower your monthly cash outflow, but it is not without risks.
• Bonuses are not guaranteed and can be reduced or eliminated.
• Bonus payments can lead to higher total interest payments over the life of the loan, since the bonus portion of the principal does not decrease for six months at a time.
• Monthly payments only provide more flexibility and control over your finances.
• It is essential to base your affordability on your regular monthly salary alone.
• Making extra payments when you receive your bonuses can help reduce the principal and interest paid.
• Consider alternative strategies, such as making bi-weekly payments or extra payments towards your mortgage principal.
• Utilize a mortgage calculator or simulator like AmortiApp to determine how much you can afford to borrow, what your monthly payments will be and the impact of different payment strategies.

Final Thoughts

In conclusion, while the Bonus-Barai system can be beneficial, it is crucial to approach it with caution and carefully consider the potential risks. By doing so, you can make informed decisions about your mortgage and avoid financial difficulties. Remember to always prioritize your financial stability and explore alternative strategies to achieve your long-term financial goals.