How does life change when interest rates rise? The basics learned from deposits and mortgages

“Bank of Japan raises interest rates”
“Bank deposit interest rates rise”

“Interest rates” that we hear about in the news.

While it is nice that interest on deposits increases, if you have a mortgage, you might feel anxious, wondering, “Will my repayment amount increase?”

In the second installment of “Financial Basics Learned from Daily Life,” we will consider the mechanism of interest rates and their connection to household finances 😊

🌱 What is the difference between “interest rate” and “interest”?

When you borrow money, you usually pay “interest” in addition to the money borrowed.

The percentage used to calculate that interest is the “interest rate.”

For example, suppose you borrow 1 million yen at an annual interest rate of 1% for one year, and you do not repay the principal during that time.

1 million yen × 1% = 10,000 yen in interest

“Interest rate” is the 1% percentage.
“Interest” is the 10,000 yen amount.

*This is a simple example to explain the mechanism. Actual interest varies depending on the repayment method, period, etc.

🏦 With deposits, you receive interest

When you deposit money in a bank, you can receive interest according to the deposit interest rate.

Let’s compare the case of depositing 1 million yen for one year.

Deposit interest rate Annual interest for one year 0.1% per year 1,000 yen 0.5% per year 5,000 yen

*Interest rates are hypothetical examples for explanation. This is a simple calculation before taxes, not considering deposits/withdrawals during the period or compound interest. The actual amount received will be lower due to taxes, etc.

Even with the same 1 million yen, if the deposit interest rate increases, the interest received increases.

Interest rates and applicable conditions vary by bank and product.

🏠 With a mortgage, you pay interest

If you are borrowing money through a mortgage or similar, you pay interest.

If the applicable interest rate rises, the interest charged on the same outstanding loan balance will increase.

However, a rise in interest rates is not the same as an immediate increase in monthly repayments.

This is because mortgages have specific times and rules for reviewing interest rates and repayment amounts.

With a fixed-rate mortgage, the interest rate is fixed for a set period. With a variable-rate mortgage, the interest rate is reviewed according to the rules defined in the contract.

📅 What is the “5-year rule” for variable interest rates?

For example, the variable-rate, principal-and-interest equal repayment plan at MUFG Bank has a “5-year rule.”

Principal-and-interest equal repayment is a method where the total monthly repayment amount, consisting of both principal and interest, remains constant.

Under this contract, even if the interest rate changes, **the monthly repayment amount remains fixed until the next 5-year review.** However, the ratio of principal to interest within the repayment amount will change.

For example, if the monthly repayment is 80,000 yen, even if the interest rate rises, the mechanism keeps it at 80,000 yen until the next repayment review.

So, it is not necessarily the case that “if news of an interest rate hike comes out, your repayment amount will increase from the following month.”

👛 What is the “125% rule” at the time of review?

Eligible contracts at the same bank also have a “125% rule” that sets a cap on increases in repayment amounts.

When reviewing the repayment amount, the new repayment amount will not exceed 125% of the previous repayment amount is the rule.

For example, if you were repaying 80,000 yen per month, the cap for that review would be,

80,000 yen × 125% = 100,000 yen

.

It does not necessarily become 100,000 yen; rather, it is a mechanism that limits the amount to 100,000 yen for that review, even if the calculated repayment amount exceeds it.

🌱 Even if the repayment amount is the same, the breakdown changes

This is a point you should know as well.

Even if the repayment amount is kept the same, if the interest rate rises, the portion allocated to interest within that amount increases. Consequently, the portion used to repay the borrowed principal decreases.

For example, let’s look at the breakdown of an 80,000 yen monthly repayment using hypothetical figures.

Principal Repayment Portion Interest Payment Portion Total Before Interest Rate Hike 60,000 yen 20,000 yen 80,000 yen After Interest Rate Hike 50,000 yen 30,000 yen 80,000 yen

*This is a hypothetical example to explain the mechanism.

These are rules to suppress a sudden surge in monthly repayment amounts, and they do not eliminate the increase in interest.

🔍 Therefore, let’s check your own contract

The 5-year rule and 125% rule are not present in all variable interest rate home loans. They vary depending on the bank, the product, and the repayment method.

For example, even at MUFG Bank, these two rules do not apply to equal principal repayment.

First, please check the following points in your contract or notices from your bank.

• Is it a fixed interest rate or a variable interest rate?

• When is the interest rate reviewed and when will it be applied?

• When is the monthly repayment amount reviewed?

• Are there a 5-year rule and a 125% rule?

If it is unclear, ask the bank you borrowed from,

“If interest rates rise, when and how will my monthly repayment amount change?”

and you can confirm it according to your own contract.

📰 Connection to the Bank of Japan’s “interest rate hike”

On September 18, 2026, the Bank of Japan decided on a policy to guide the interest rate for overnight lending between financial institutions to around 1.25%.

While this is not the interest rate for our deposits or home loans itself, it also affects those interest rates through bank funding and other means.

It is important not to judge based solely on the numbers in the news, but to check how it will change in your own contract.

✨ Today’s summary

When interest rates rise, it works in a direction where the interest received on savings increases, and the interest paid on loans also increases.

However, the timing and mechanism for when the monthly repayment amount for a home loan changes vary depending on the contract.

If you feel anxious, first check the details of your contract.

Let’s start thinking about household finances by knowing “when, what, and how things will change”😊

Tomorrow, “What are yen depreciation and yen appreciation?”
We will consider the connection between exchange rates and daily life, using imported food and overseas travel as examples.