Can you answer what your variable interest rate is linked to? The essence of the 'Short Prime Rate' and choosing a bank
Right now, the housing loan community on X is in an uproar over the term ‘Short Prime Rate’.
There are several triggers. One is that Mitsubishi UFJ Bank announced a change to its short-term prime rate (short prime) at the same time it raised interest rates on ordinary deposits. Another is that some online banks raised their base rates, spreading suspicion that ‘banks not linked to the short prime might be taking advantage of the situation to raise rates.’ In response, those with experience in financial practice pointed out the blunt truth that ‘the short prime itself is not something that can be quantitatively determined from the outside’.
‘Banks linked to the short prime are safe.’ ‘No, the short prime is also at the bank’s discretion.’ ‘The short prime for corporate loans and the base rate for housing loans are different things.’
The debate is convoluted, and honestly, it seems many people are confused.
I personally took this opportunity to check primary sources and reorganize my understanding. To conclude, the dichotomy of ‘linked to the short prime or not’ is half correct and half misleading. The essence lies in the fact that ‘the cost of changing the base rate differs depending on the bank.’ I will explain this step by step.
1. What is the short prime: Starting with an accurate definition
The short-term prime rate (short prime) is the most favorable interest rate when a bank lends to its most creditworthy corporate clients for the short term (less than one year).
There are three important points.
1. It is not decided by the Bank of Japan. Each bank decides it for itself.
Because of the sound of the term ‘prime rate,’ it is often mistaken for an official interest rate, but the short prime is set independently by each bank. What the Bank of Japan publishes is the ‘most frequent value of the short prime among major banks,’ and it is the banks themselves that decide it.
2. However, there is a strong practice of following policy rates.
The current short prime for major banks is 2.375% (applied from August 3, 2026). Following the Bank of Japan’s decision to raise the policy rate from 0.75% to 1.0% in June 2026, Mizuho Bank and others raised it by 0.25% from 2.125%.
Looking back at history, the short prime did not move even once for 15 years, remaining at 1.475% from 2009 to 2024. In the interest rate hike phase since 2024, it has been rising in steps, with the short prime also increasing by 0.25% every time the policy rate increases by 0.25%. ‘Faithfully following the magnitude of policy rate hikes’ is the track record so far.
3. It serves as the foundation for the ‘base rate’ of variable interest rates (depending on the bank).
Traditional bank variable housing loans have a structure where ‘base rate = short prime + 1%,’ and the applied interest rate is determined by subtracting the preferential margin from this. If the short prime is 2.375%, the base rate is 3.375%, and if the preferential margin is -2.3%, the applied rate is 1.075%. Real estate investment loans (apartment loans) are also often of the ‘short prime + spread’ type.
2. What is being disputed on X?
Organizing the current controversy, there are three layers.
Point 1: The theory that ‘online banks are not linked to the short prime = they can raise rates at their discretion.’
Online banks such as au Jibun Bank, Sony Bank, and Rakuten Bank determine their base rates independently by ‘comprehensively considering market interest rates and funding costs’ rather than using the short prime. A prominent account has been sarcastically calling this ‘RakIBOR’ for three years (the post in question has over 50,000 views).
The view emerged that some online banks raised rates by more than the policy rate increase (0.25%) during the interest rate hike phase, and criticism that this was ‘taking advantage of the situation to raise rates’ spread. Posts saying ‘Banks linked to the short prime are safer after all’ are also gaining traction.
Point 2: The counterargument that ‘the Short-Term Prime Rate is also discretionary’
In response to this, a practitioner with experience in interest rate determination pointed out that ‘neither the Short-Term Prime Rate, the Long-Term Prime Rate, nor LIBOR are things whose nature can be quantitatively understood from the outside.’ That is correct; the Short-Term Prime Rate is not legally linked to the policy interest rate. The idea that ‘if it is linked to the Short-Term Prime Rate, it is objective and safe’ is not strictly accurate.
Point 3: The observation that ‘the Short-Term Prime Rate for corporate loans and the mortgage base rate are different’
As a further nuanced point, it was also noted that some banks set the Short-Term Prime Rate for corporate lending and the base rate for mortgages separately, and that confusing information is being spread.
3. The essence lies in the ‘cost of changing it’
So, how should we understand this? My assessment is as follows.
Both the Short-Term Prime Rate and the base rates of online banks are legally at the discretion of the banks. What differs is the ‘cost of changing them.’
The Short-Term Prime Rate of mega-banks serves as the foundation for all lending, not just mortgages, but also corporate loans and loans to small and medium-sized enterprises. If they raise the Short-Term Prime Rate beyond the policy interest rate, they risk criticism from all directions, including corporate borrowers, and even the risk of it becoming a political issue. In fact, in the current debate, there was a view that ‘public opinion would not forgive Mitsubishi if they raised the Short-Term Prime Rate by 30bps, so the mega-banks’ Short-Term Prime Rate is the safest.’It is too big to be moved lightly—this ‘stickiness’ is the substantial source of security in being linked to the Short-Term Prime Rate The fact that it has not moved in the past 15 years supports this.
On the other hand, because the base rate of online banks is completed solely within the mortgage product, the hurdle for change is structurally lower. While the method of ‘comprehensively considering market interest rates, etc.’ has the rationality of being able to flexibly reflect changes in the procurement environment, it is difficult to verify from the outside. While this has worked to the customer’s advantage during periods of low-interest-rate competition, it is still difficult to predict how the same flexibility will work during a period of interest rate hikes, as there is little track record.
It should be noted that some banks, such as SBI Sumishin Net Bank, use their ‘own short-term prime rate’ as a benchmark. Although it is called a short-term prime rate, it is determined independently, separate from the mega-banks’ short-term prime rate. If you judge only by the surface, thinking ‘it’s safe because it says it’s linked to the short-term prime rate,’ you will overlook this difference.
4. Implications for real estate investment
① Investment loans will rise before mortgages, and they will certainly rise
Many real estate investment loans are linked to the Short-Term Prime Rate plus a spread, and the preferential margin is thinner than that of mortgages. If the Short-Term Prime Rate rises by 0.25%, the applicable interest rate on existing loans will almost certainly rise by 0.25%. With the policy interest rate currently at 1.0%, an increase of approximately 1% compared to 2024 is already being reflected in existing loans.
To reiterate the figures from a previous article, for a 100 million yen loan over 30 years, a +0.25% interest rate increase results in an annual burden increase of 139,000 yen, and a +1.0% increase results in an annual burden increase of around 500,000 yen. A property with a gross yield of 4% is at the line where cash flow becomes zero. Please check your money consumption loan contract to see what the base rate for your loan is.
② The ‘5-year rule/125% rule’ is often not available for investment loans
Many banks have a mechanism for variable interest rate mortgages that eases the review of repayment amounts every 5 years, but this is often not applied to investment loans. You should structure your cash flow on the premise that interest rate revisions will be immediately reflected in your repayment amount.
③ Checklist for choosing a bank
When taking out a new loan or refinancing, you should check the following three points in addition to the low interest rate.
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How the base rate is determined: Is it linked to the Short-Term Prime Rate or an independent standard? If it is an independent standard, look at the past revision history
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Timing of revisions: Twice a year (April and October) is the traditional type. The shorter the revision cycle, the faster interest rate fluctuations are transmitted
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Conditions for the preferential margin: Is the preferential margin ‘fixed for the entire period’ or ‘conditional’? Contracts where the preferential rate can be revoked based on transaction conditions are doubly painful during a period of rising interest rates.
5. Summary
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The short-term prime rate is the prime lending rate determined by each bank. It remained unchanged at 2.375% for 15 years at 1.475%, but in the current phase of rising interest rates, it is faithfully following the policy rate.
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The essence of the debate on X is ‘short-term prime rate linkage equals peace of mind’ versus ‘the short-term prime rate is also subject to discretion.’ Both are subject to discretion, but the short-term prime rate has a ‘stickiness’ because it is the foundation for all lending and cannot be moved lightly.
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The proprietary standards of internet banks are agile but have low predictability. There are also intermediate forms, such as the ‘in-house short-term prime rate’ of SBI Sumishin Net Bank.
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Investment loans are often linked to the short-term prime rate with thin preferential margins, meaning they are hit fastest by interest rate hikes. Build your cash flow on the assumption that there is no 5-year rule.
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When choosing a bank, look at ‘the current low interest rate’ and ‘how the base rate is determined’ as a set.
Everyone looks at ‘what percentage they can borrow at.’ Few people look at ‘what that interest rate is linked to, whose discretion it is under, and under what constraints it moves.’ In a period of rising interest rates, this difference can amount to millions of yen.