How will repayments change if variable interest rates rise? | Checking the 5-year rule, 125% rule, prepayments, and refinancing with numbers

For those paying off a home loan with a variable interest rate, we will use hypothetical figures to check how repayments change when interest rates rise.

* This is a general explanation and simulation. It is not advice on refinancing or early repayment. Please confirm actual decisions based on simulations and contract details from your lending financial institution.

What are the 5-year rule and 125% rule?

At many financial institutions, variable interest rates with principal and interest equal repayment have the following rules.

The 125% rule is not a cap on the total repayment amount. If unpaid interest remains until the end of the term, you may be required to pay it all at once in the final installment (handling depends on the contract).

Some financial institutions and products do not have these rules, and they do not apply to principal equal repayment. Please check your contract first.

Calculation example (hypothetical)

Loan of 35 million yen, 35 years, principal and interest equal repayment, initially 0.6%, rising to 1.6% from the 3rd year (25th installment), and assuming it remains unchanged thereafter.

• Total repayment amount: No rule 44,961,037 yen / With 5-year/125% rule 45,123,046 yen

* For the version with rules, it is reviewed every 60 installments thereafter; in this example, it becomes 109,940 yen from the 241st installment and 109,939 yen from the 301st installment. The final installment settles the balance, at 107,268 yen for no rule and 109,865 yen for with rules (included in the total repayment amount).

Interest increases even during the deferral period, and from the 61st installment onwards, it becomes higher than the no-rule option, and the total repayment amount is about 160,000 yen higher. The rule is a mechanism to suppress sudden increases, not to reduce the burden.

(Interest is simplified by calculating ‘balance x annual rate / 12’ monthly, rounding down fractions of a yen, etc. There will be a difference from the actual repayment amount.)

3 things to be careful about

① Early repayment comes in ‘term reduction’ and ‘repayment amount reduction’ types

The term-shortening method is more effective at reducing interest, while the repayment-reduction method is better if you want to lower your monthly burden. In the Japanese Bankers Association example (25 million yen, 35 years, 2.5%, 1 million yen after 3 years), the interest savings are approximately 1.16 million yen for the term-shortening method and approximately 450,000 yen for the repayment-reduction method.

② Compare refinancing including incidental costs

Hypothetical example: Current loan balance is 25 million yen, 25 years remaining, 1.5% fixed rate, principal and interest equal repayment. The refinancing loan is also fixed rate, principal and interest equal repayment, 25 years, with 750,000 yen in incidental costs paid in cash.

Refinancing to 1.3% reduces the monthly payment by 2,333 yen, but including incidental costs, the total burden increases by about 50,000 yen. At 1.0%, the burden decreases by about 980,000 yen, but the incidental costs are recovered at the 131st payment (about 11 years later).

③ Do not shorten the term too much and keep cash on hand

The Japan Housing Finance Agency advises that if the repayment period from the initial repayment date to the final repayment date becomes less than 10 years due to early repayment, it will no longer be eligible for the mortgage deduction (this does not refer to the remaining period at the time of early repayment). Money used for early repayment generally cannot be recovered.

Sources:

About the calculation sheet (created by the author)

The calculation examples for interest rate hikes and refinancing were produced using the same calculation rules as the xlsx calculation sheet I created (the approximately 1.16 million yen and 450,000 yen for early repayment are figures from the Japanese Bankers Association’s public example).

Free trial version (0 yen, BOOTH)

Fixed interest rate, principal and interest equal repayment table (up to 420 payments) and one-time early repayment comparison.

https://wakame-sheet.booth.pm/items/9007600

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• Daily interest, bonus payments, interest rate additions for guarantee fees, prepayment fees, and mortgage tax deductions are not included in the calculations. Refinancing options are limited to fixed-rate and principal-and-interest equal repayment plans only.