Bonus Payment Trap: How to Pay Off Flat 35 Smarter

In Japan, the "Bonus Combined Payment" is common for home loans (Flat 35 and bank loans). Many people set it up to pay more during the summer and winter bonus months to keep monthly payments low. However, bank clerks won't tell you this, but this is also "a mechanism to make you pay more interest."

The 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.

The Pain: 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. What's even riskier is bonus cuts. Even if bonuses are not paid due to a recession, loan repayments won't wait.

The Solution: Unification to 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.

Understanding the Impact of Bonus Payments 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.

Key Takeaways

Bonus payments can lead to higher total interest payments over the life of the loan.

Monthly payments only provide more flexibility and control over your finances.

Making extra payments when you receive your bonuses can help reduce the principal and interest paid.

Using a mortgage simulator like AmortiApp can help you visualize the impact of different payment strategies on your loan.

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.

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

The bonus payment trap can cost you thousands of yen in unnecessary interest payments over the life of your loan. By understanding the implications of bonus payments and making informed decisions about your loan contract, you can take control of your finances and make the most of your bonuses. Remember to simulate different payment strategies using AmortiApp and consider making extra payments when you receive your bonuses to reduce the principal and interest paid.