In the Era of 1.25% Interest Rates, the 'Affordable' Home Price is Shrinking—New Criteria for Home Buying Based on a 40 Million Yen Loan Simulation [September 2026]
# In the Era of 1.25% Interest Rates, the ‘Affordable’ Home Price is Shrinking—New Criteria for Home Buying Based on a 40 Million Yen Loan Simulation [September 2026]
On September 18, 2026, the Bank of Japan raised its policy interest rate to 1.25%. While news reports often mention that ‘mortgage rates will rise,’ there is surprisingly little information that dives into the specifics of what exactly will change and by how much.
Therefore, in this article, I have calculated the figures myself using a ‘common scenario’ of a 40 million yen loan over 35 years. Here are three conclusions upfront.
**Conclusion 1: If variable interest rates rise by 1%, monthly repayments will increase by approximately 20,000 yen, and total repayments will increase by approximately 8.38 million yen.**
**Conclusion 2: The amount you can borrow for the same monthly repayment has already decreased by approximately 4.4 million yen compared to the 0.5% interest rate era. Even if home prices do not fall, the ‘homes you can afford’ are becoming smaller.**
**Conclusion 3: The era where mortgage tax deductions almost completely offset interest payments is over. From now on, it is safer to plan your finances by treating the tax deduction as a ‘bonus’.**
Below, I will look at the supporting figures and calculations in order. In this article, confirmed facts are labeled [Fact], and my own estimates or interpretations are labeled [Author’s View] to distinguish them.
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## 1. What Happened: Policy Interest Rate at 1.25%, Long-term Interest Rate at 3%
### The Bank of Japan’s Second Rate Hike in Three Months
[Fact] At the Monetary Policy Meeting held on September 17-18, 2026, the Bank of Japan raised the policy interest rate from around 1.0% to around 1.25%. 1.25% is the highest level in about 31 years, since 1995. This is an additional rate hike just three months after the June hike, accelerating the pace from the ‘roughly once every six months’ seen since the end of negative interest rates in March 2024.
The background cited is the risk of prices rising more than expected due to high crude oil prices and a weak yen. The decision was not unanimous, with two members dissenting.
Let me clarify one term here. The ‘policy interest rate’ refers to the short-term interest rate guided by the Bank of Japan, specifically the interest rate at which banks lend and borrow money to each other for just one day (uncollateralized call rate). Mortgage **variable interest rates** are strongly influenced by this policy rate.
The trend of the policy interest rate is summarized as follows.
| Period | Policy Interest Rate |
|—|—|
| March 2024 | Around 0-0.1% (End of negative interest rates) |
| July 2024 | Around 0.25% |
| January 2025 | Around 0.5% |
| December 2025 | Around 0.75% |
| June 2026 | Around 1.0% |
| September 2026 | Around 1.25% |
### Long-term Interest Rates Exceed 3% for the First Time in About 30 Years, Flat 35 at Record High
Another important factor is the ‘long-term interest rate.’ This refers to the yield on 10-year government bonds, and mortgage **fixed interest rates** are linked to this.
[Fact] The long-term interest rate (yield on newly issued 10-year government bonds) hit 3% on September 1 and rose to 3.015% on the 2nd. Both are at their highest levels in about 30 years.
[Fact] The September interest rate for the ‘Flat 35’ all-period fixed-rate mortgage (loan period 21-35 years, loan ratio 90% or less, most frequent rate) is 3.46% per annum, up 0.17% from the previous month’s 3.29%. This is the highest level since the calculation method was changed in October 2017 (Source 4). Regarding the October interest rate, there are forecasts that it will reach around 3.64% based on the interest rate of institutional bonds.
### Reflection in Variable Interest Rates is Yet to Come
[Fact] There is a time lag in reflecting changes in variable interest rates. According to Mogecheck, a mortgage comparison service, the June rate hike will see base rates revised at most banks on October 1, and it is expected to be reflected in the repayments of existing borrowers from January 2027 onwards. The September rate hike is generally expected to be reflected in the base rate revision in April 2027, with the impact on repayments starting from July 2027.
The ‘base rate’ is like the ‘list price’ of a mortgage determined by each bank, and the actual interest rate paid is calculated by subtracting the discount (reduction width) determined at the time of the contract from this.
[Fact] According to the company’s data, the variable interest rate as of September 2026 is 1.227% per annum, and Flat 35 is 3.46% per annum, with the difference of 2.23% being the largest since data collection began in January 2018.
[Author’s View] In other words, we are currently in a transitional phase where ‘variable interest rates have not yet fully risen, but fixed interest rates have already risen significantly.’ I think it is realistic for those buying a home from now on to consider adding at least 0.25-0.5% to the variable interest rates currently visible.
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## 2. Simulation ①: How Much Will Monthly Repayments Increase as Interest Rates Rise?
This is the main topic. I calculated based on the following conditions.
Conditions: Loan amount of 40 million yen, repayment period of 35 years, equal principal and interest repayment (the most common method where monthly repayments remain constant), no bonus repayments. Costs such as handling fees and group credit life insurance are not included.
| Interest Rate | Assumption | Monthly Repayment | Total Repayment | Interest Portion |
|—|—|—|—|—|
| 0.5% | Variable rate level from a few years ago (hypothetical) | 103,834 yen | Approx. 43.61 million yen | Approx. 3.61 million yen |
| 1.2% | Current variable rate benchmark | 116,681 yen | Approx. 49.01 million yen | Approx. 9.01 million yen |
| 1.7% | If variable rate rises by +0.5% | 126,430 yen | Approx. 53.10 million yen | Approx. 13.10 million yen |
| 2.2% | If variable rate rises by +1.0% | 136,648 yen | Approx. 57.39 million yen | Approx. 17.39 million yen |
| 3.46% | Flat 35 (September, most frequent rate) | 164,391 yen | Approx. 69.04 million yen | Approx. 29.04 million yen |
(Author’s simulation. This is a simple calculation assuming the interest rate remains constant for 35 years.)
There are three points.
First, **if the variable interest rate rises by 1% from now, monthly repayments will increase by about 20,000 yen, and total repayments will increase by about 8.38 million yen.** A ‘1%’ interest rate increase may seem small, but for a 40 million yen loan over 35 years, it becomes an amount that is far more than the cost of a car.
Second, **the difference in monthly repayments between Flat 35 and the variable interest rate (1.2%) is about 48,000 yen.** This is the size of the ‘insurance premium for choosing a fixed rate’ right now.
Third, compared to the 0.5% of a few years ago, the interest on the same 40 million yen has already increased 2.5 times, from about 3.61 million yen to about 9.01 million yen.
[Author’s View] Whether ‘variable or fixed is more profitable’ ultimately depends on future interest rates, so no one can say for sure. However, looking at this table, the axis of judgment is simple: I believe it comes down to whether you can say ‘Yes’ to the question, ‘Can my household budget handle it if I borrow with a variable rate and it rises by +1% (about 20,000 yen per month)?’
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## 3. Simulation ②: How Much Has the ‘Borrowable Amount’ Decreased for the Same Repayment?
This is the part I most want to convey this time. Many articles calculate ‘how much repayments will increase,’ but for those looking for a home, what really matters is the opposite direction: **’When the monthly payment amount is fixed, how much can I borrow?’**
Therefore, I fixed the monthly repayment at 103,834 yen (the repayment amount when borrowing 40 million yen at a 0.5% interest rate) and back-calculated the amount that can be borrowed for each interest rate.
| Interest Rate | Borrowable Amount | Difference from 0.5% |
|—|—|—|
| 0.5% | Approx. 40 million yen | ― |
| 1.2% | Approx. 35.60 million yen | Approx. −4.40 million yen |
| 2.2% | Approx. 30.39 million yen | Approx. −9.61 million yen |
| 3.46% | Approx. 25.27 million yen | Approx. −14.73 million yen |
(Author’s simulation. 35 years, equal principal and interest repayment)
Even with the same monthly repayment of 104,000 yen, just by the interest rate rising from 0.5% to 1.2%, the amount you can borrow decreases by about 4.4 million yen. If it rises by another 1%, the decrease will be nearly 10 million yen.
[Author’s View] This effectively means the same thing as ‘home prices have risen by 4.4 to 9.6 million yen.’ Since interest rate hikes are overlapping with high property prices, a situation where ‘a home that could have been bought a few years ago cannot be bought with the same monthly income’ is quietly progressing.
So, what about property prices?
[Fact] According to the Real Estate Economic Institute, the average price of new condominiums in the Tokyo metropolitan area (1 metropolis and 3 prefectures) in the first half of 2026 was 101.35 million yen, exceeding 100 million yen for the first time as a first-half figure. On the other hand, in August 2026 alone, the average was 97.7 million yen, a 5% decrease from the same month last year, and the number of units released also decreased by 12.4%.
[Author’s View] The August decline is only one month of data, so we cannot say ‘prices have started to fall’ based on this alone. However, as calculated so far, interest rate hikes are definitely eroding the purchasing power of buyers. If the upper limit that buyers can pay drops, it is logically natural that price increases will eventually be braked. Whether the ‘price ceiling’ or the ‘interest rate hike’ will swing in which direction needs to be verified with statistics over the next few months.
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## 4. Simulation ③: The Era Where ‘Interest is Offset’ by Mortgage Tax Deductions is Over
The mortgage tax deduction is a system where 0.7% of the year-end loan balance is returned from income tax and resident tax for up to 13 years.
[Fact] In the 2026 tax reform, the system was extended by 5 years until December 2030, and revisions were made such as relaxing the floor area requirement to 40 square meters or more (Source 8). For new construction, the loan limit is 35 million yen for ZEH-level energy-efficient housing and 20 million yen for energy-efficient standard-compliant housing (with additions for child-rearing households and young married couples), and the deduction rate of 0.7% and deduction period of 13 years remain unchanged (Source 9). For used homes, the deduction period has been extended to 13 years for properties with high energy-saving performance, and the loan limit has also been raised.
Previously, because variable interest rates were below 0.7%, it was sometimes said that ‘it is more profitable to borrow.’ This is because there were cases where the tax returned was more than the interest paid. So, I compared the first year of a 40 million yen loan.
| Interest Rate | 1st Year Interest Paid | 1st Year Tax Deduction (Limit) | Difference |
|—|—|—|—|
| 0.4% | Approx. 158,000 yen | Approx. 245,000 yen | Tax deduction is about 87,000 yen more |
| 1.2% | Approx. 475,000 yen | Approx. 245,000 yen | Interest is about 230,000 yen more |
(Author’s simulation. ZEH-level energy-efficient new construction, general household, calculated at loan limit 35 million yen × 0.7%. 0.4% interest rate is a hypothetical variable rate level from a few years ago. The actual tax deduction amount is only returned up to the amount of income tax and resident tax paid that year (with a limit).)
At a 1.2% interest rate, the tax deduction covers only about half of the interest.
[Author’s View] The idea that ‘I should borrow more because there is a tax deduction’ or ‘it is more profitable not to make early repayments’ is based on the premises of the low-interest-rate era. Now that interest rates significantly exceed the 0.7% deduction rate, I think it is safer to prioritize not borrowing too much, positioning the tax deduction as a ‘bonus where part of the interest is returned.’ However, if you reduce your cash on hand too much through early repayments, you will be in trouble in case of illness or unemployment, so this is on the premise that you have secured separate living defense funds.
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## 5. Variable or Fixed: Choose Based on ‘Can You Endure It’ Rather Than ‘Profit or Loss’
### Fixed Rates Become Profitable Only After ‘About 9 More Rate Hikes’
[Fact] Mogecheck sees that it would take about 9 more rate hikes of 0.25% each to close the gap between variable and fixed rates (2.23%), and the possibility of that scenario is currently low. On the other hand, in a survey of economists (ESP Forecast, median of June 2026 survey), the policy interest rate is predicted to rise to about 1.6% by the end of June 2027.
[Author’s View] Looking only at the expected value of the amount, many experts’ view is that variable rates currently have the advantage. However, what is important here is not the average forecast, but ‘whether my household budget will break if the forecast is wrong.’ I have organized it as follows.
Variable rates are suitable for those whose household budget can handle the repayment amount if it rises by +1% (about 137,000 yen per month for 40 million yen) and who can put the difference between variable and fixed (about 48,000 yen per month) into savings or investments.
Fixed rates are suitable for those whose household budget would become difficult if it rises by +1%, those who can clearly see ‘times when it would be a problem if repayment amounts increased’ such as the peak of educational expenses, and those who feel anxious every time they see news about interest rates. I think mental peace of mind is also a legitimate value.
### The Often Overlooked ‘5-Year Rule and 125% Rule’
Some banks have mechanisms for variable interest rates where repayment amounts do not increase immediately even if interest rates rise.
[Fact] The ‘5-year rule’ is a rule where the monthly repayment amount does not change for 5 years even if the interest rate rises, and the ‘125% rule’ is a rule that limits the increase to 1.25 times the previous amount even if the repayment amount increases. However, since interest is increasing during that time, the proportion of principal in the repayment amount decreases, the balance does not decrease as planned, and there is a possibility that unpaid interest will remain at the end.
[Author’s View] This rule is a ‘cushion to prevent sudden increases in burden,’ not ‘magic that makes the burden disappear.’ The fact that it is difficult to notice the impact of interest rate hikes when monthly repayment amounts do not change is actually the scary part. It is safe for those borrowing with variable rates to make it a habit to check twice a year whether the balance is decreasing properly. Also, some banks do not have this rule, so please be sure to check before signing a contract.
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## 6. Five Things People Considering Buying a Home Should Check Now
Finally, based on the simulations so far, I have summarized what you should actually do before purchasing.
**① Try keeping a household budget with a ‘+1%’ repayment amount**
Calculate the monthly repayment amount with an interest rate 1% higher than the current variable rate, and actually live with that amount for about 3 months (put the difference into savings). If you feel it is difficult, it is a sign to reconsider the loan amount.
**② Decide the loan amount based on ‘what you can repay’ rather than ‘what you can borrow’**
The amount you can pass in a bank’s screening is different from the ‘amount you can continue to repay.’ As in Simulation ②, when interest rates rise, the amount you can borrow for the same repayment amount decreases significantly.
**③ Do not believe the ‘current figures’ of variable interest rates as they are**
The September rate hike has not yet been reflected in the variable interest rates of most banks. When comparing, consider adding 0.25-0.5% to the current interest rate.
**④ Mortgage tax deductions change significantly depending on the energy-saving performance of the property**
The loan limit changes depending on whether it is new or used, and which category of energy-saving performance it falls into. Proof documents will be required, so please check with the seller or real estate agent before signing the contract.
**⑤ If you choose a fixed rate, check the interest rate at the time of loan execution**
Fixed interest rates such as Flat 35 are applied at the time of receiving the loan (at the time of handover), not at the time of application. For new construction where there is a period until completion, it is necessary to assume interest rate hikes during that time.
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## Summary
The level of a 1.25% policy interest rate and a 3% long-term interest rate is a ‘world with interest rates’ for the first time in about 30 years. What was seen in this simulation was that the impact of interest rate hikes is not only ‘repayment amounts increasing,’ but also takes effect in forms such as ‘the home you can buy with the same income becomes smaller’ and ‘interest cannot be covered by tax deductions.’
No one can accurately answer the question ‘Is now the time to buy?’ But you can find the answer to ‘How much can I continue to pay even if interest rates rise?’ with today’s household budget and a calculator. Before looking for a home, I recommend deciding on that one number first.