How much benefit mortgage refinancing (karikae) delivers depends on the balance between the interest-rate gap and the closing costs involved. Here's an overview of the rough thresholds for considering refinancing and the cautions involved.
- Refinancing (karikae) means switching your current mortgage to a new loan with a different financial institution, using the new loan to pay off your remaining balance in one lump sum.
- Refinancing comes with costs — administrative fees, guarantee fees, registration costs, and more — so you need to compare based on total cost, not just the interest-rate gap.
- The traditional rule of thumb has been "an outstanding balance of at least ¥10 million, at least 10 years of repayment remaining, and an interest-rate gap of around 1%," but in a low-rate environment, even a gap of around 0.5% can pay off in some cases.
- Refinancing requires enrolling anew in group credit life insurance (dantai shin'yō seimei hoken, or danshin for short), which means disclosing your health status again.
- Some people use refinancing as an opportunity to also switch rate types, such as moving from a variable rate to a fixed rate.
Conclusion: Judge by Total Cost, Not Just the Interest-Rate Gap
The benefit of refinancing can't be judged by the interest-rate gap alone. The basic approach is to judge based on whether your total repayment amount goes down even after subtracting the costs of refinancing — taking into account both the traditional rule of thumb and how thinking has shifted in a low-rate environment.
The Basic Mechanics of Refinancing
Refinancing is the process of paying off your current mortgage in full and taking out a new one with a different lender. If you can switch to a lower-rate loan, you may be able to reduce the interest burden over your remaining repayment period. On the other hand, because it's a new contract, costs arise — administrative fees, guarantee fees, registration costs (to discharge the old mortgage and register the new one), and so on.
The Costs of Refinancing
Refinancing costs include administrative fees, guarantee fees, stamp duty, registration costs (discharging the old mortgage and registering the new one), and judicial scrivener's fees. Since the breakdown and level of these costs vary by institution and loan product, you'll need to get quotes from candidate lenders and compare the benefit of the rate gap against these costs.
Rough Thresholds for When Refinancing Tends to Pay Off
The traditional rule of thumb for considering refinancing has been that it tends to pay off when three conditions line up: "an outstanding balance of at least ¥10 million," "at least 10 years of repayment remaining," and "an interest-rate gap of around 1%." That said, in recent years' low-interest-rate environment, even a gap of around 0.5% can produce a meaningful reduction in total repayment, depending on your balance and remaining term. Whether it actually pays off for you is something to confirm with a simulation comparing before and after.
Re-enrolling in Group Credit Life Insurance
Because refinancing means signing a new mortgage contract, you'll need to enroll again in group credit life insurance (danshin). Enrollment requires disclosing your health status, and if your health has changed since your original loan, keep in mind that you may not be able to enroll in the danshin plan you want. We cover the types and how to choose danshin in a separate article, Types of Group Credit Life Insurance (Danshin) and How to Choose.
Refinancing as an Opportunity to Reconsider Your Rate Type
Refinancing isn't only used to lower your rate — it's also used as an opportunity to reconsider the rate type itself, switching from variable to fixed or vice versa. It's worth weighing how much future interest-rate-rise risk you can tolerate when deciding on the rate type for your new loan.
Frequently Asked Questions
How large does the interest-rate gap need to be for refinancing to pay off?
Traditionally, a gap of around 1% has been the benchmark, but in a low-rate environment, even a gap of around 0.5% can pay off depending on your outstanding balance and remaining term. The most reliable approach is to check with a simulation that accounts for the closing costs.
What costs are involved in refinancing?
Costs include administrative fees, guarantee fees, registration costs (discharging and registering the mortgage), and judicial scrivener's fees. The breakdown and level vary by institution, so we recommend getting quotes in advance.
Can you fail the group credit life insurance screening when refinancing?
Yes. Refinancing is a new contract, so you have to re-enroll in danshin, and depending on your health, you may not be able to join the danshin plan you want.
Summary
Mortgage refinancing needs to be judged not just on the interest-rate gap but also on closing costs and re-enrolling in group credit life insurance. Weigh both the traditional benchmark and the realities of today's low-rate environment, and compare your total repayment amount with a simulation before deciding.