November 4, 2026

Policy Interest Rate at 1.25%: Should You Put Down a Mortgage Down Payment or Save for Education Expenses?

This article is for informational purposes only and does not recommend the purchase of specific properties or financial products, nor does it encourage borrowing. Please make final decisions based on your own circumstances and consult with a professional if necessary.

Current Situation: Has the Environment Surrounding Down Payments Changed?

The Relationship Between Mortgage Screening, Interest Rates, and Down Payment Ratios

Mortgage interest rates are generally structured to change depending on the loan-to-value (LTV) ratio—the proportion of the loan amount relative to the property price. For Flat 35 (loan terms of 21 to 35 years), as of November 2026 (funding receipt), the rate is 3.810% per annum for an LTV ratio of 90% or less, and 3.920% per annum for an LTV ratio exceeding 90%, representing a difference of 0.110% (Japan Housing Finance Agency, “Latest Interest Rate Information: Long-term Fixed-rate Mortgage [Flat 35]”). In other words, the applicable interest rate changes depending on whether you can cover about 10% of the property price with your own funds. Some private financial institutions also adjust interest rates or preferential margins based on the down payment ratio, but these conditions vary by institution and cannot be indicated by a uniform figure.

Usage Trends for Full Loans and Low Down Payment Loans

According to a survey by the Japan Housing Finance Agency (targeting those who took out mortgages between April and September 2025), the most common loan-to-value ratio (loan amount ÷ housing price) was “over 90% to 100% or less” at 24.1%, with 12.0% being “over 100%” (Japan Housing Finance Agency, “Survey on Mortgage Users [January 2026 Survey]”). Borrowing methods close to so-called full loans, where almost no personal funds are put down, are not uncommon.

How the Significance of Down Payments Changes in a Rising Interest Rate Environment

At its Monetary Policy Meeting on October 29–30, the Bank of Japan decided to keep the policy interest rate (the uncollateralized overnight call rate, which is the rate at which financial institutions lend and borrow funds to each other until the next day) at around 1.25%. The vote was 8 to 1, with member Takada proposing a hike to around 1.5%, but the proposal was rejected by a majority (Bank of Japan, “On the Conduct of Monetary Policy”). The level of around 1.25% is an increase from the level of around 1.0% set at the September 18 meeting (Bank of Japan, “Change in the Guideline for Market Operations”).

In the Outlook Report (Outlook for Economic Activity and Prices) decided at the same meeting, the Bank of Japan stated its basic view: “The Bank will continue to raise the policy interest rate and adjust the degree of monetary accommodation in accordance with the economic, price, and financial situation.” The timing and pace of adjustments will be considered while examining the certainty and risks of the outlook being realized. The median of the policy board members’ forecasts for the year-on-year change in the consumer price index (excluding fresh food) is +2.5% for fiscal 2026, +2.6% for fiscal 2027, and +2.0% for fiscal 2028 (Bank of Japan, “Outlook for Economic Activity and Prices (October 2026) Basic View”).

As an example of a private mortgage, the variable interest rate for new loans at MUFG Bank is 1.195% per annum for loans taken out in November 2026 (MUFG Bank, “Mortgage Interest Rates”). Following the Bank of Japan’s decision and the rise in market interest rates, the bank announced that it would raise the short-term prime rate from 2.375% to 2.625% per annum effective November 2 (MUFG Bank, “Revision of the Short-term Prime Rate”). Since the applicable interest rate for variable-rate loans is reviewed even after borrowing, the larger the loan amount, the greater the increase in repayment amounts when interest rates rise. As interest rates rise, the total amount of interest increases even for the same loan amount, making the significance of putting down a down payment to reduce the loan amount greater than during periods of low interest rates.

What Changes for Child-rearing Generations: The Weight of Choosing Between Two Uses for Available Funds

What Changes Between Allocating Funds to a Down Payment and Saving Them for Education Expenses?

For households with a lump sum of several million yen on hand, whether to allocate it to a down payment or keep it for education expenses is not an isolated choice but a linked one. If you allocate it to a down payment, your monthly repayment amount and total interest paid will be reduced, but your available funds will be thinner when education expenses are needed. Conversely, if you keep it for education expenses, you will be less likely to need to borrow in a hurry when it is time for school advancement, but the interest paid over the entire term of the mortgage will increase. Which is more advantageous depends on the combination of interest rate levels, loan term, and the timing of education expenses, and cannot be stated unconditionally.

The “Amount of Cash Needed for Education” Varies Depending on the Number and Age of Children

The burden that education expenses place on household finances varies greatly depending on the number and age of children. A household with one preschooler and a household with a high school student and a junior high school student currently enrolled have different scales of cash needed in the coming years. Especially for families who may choose private school or university, understanding the scale and timing of the cash required at an early stage is a prerequisite for considering the amount of a down payment. According to the Ministry of Education, Culture, Sports, Science and Technology’s “FY2023 Survey on Educational Expenses for Children,” the total annual educational cost is 542,450 yen for public junior high school, 1,560,359 yen for private junior high school, 596,954 yen for public high school (full-time), and 1,179,261 yen for private high school (full-time). Over the 15 years from age 3 in kindergarten to the third year of high school, the total is approximately 6.14 million yen if all are public, and approximately 19.69 million yen if all are private (Ministry of Education, Culture, Sports, Science and Technology, “FY2023 Survey on Educational Expenses for Children”).

Emergency Risks of Buying a Home with Thin Available Funds

If you purchase a home with a large down payment that significantly reduces your available funds, your subsequent household finances will be strongly tied to mortgage repayments and education expenses. If a decrease in household income (due to job changes, leave of absence, illness, etc.) overlaps in this state, there will be little room to make ends meet with cash on hand. How much of a down payment to put down is a decision that involves not only the advantages and disadvantages at the time of purchase but also the flexibility of household finances for several years after the purchase.

Benefits: The Actual Effect of Making a Down Payment

The Aspect Where Monthly Repayments Decrease, Making It Easier to Run Parallel with Education Expenses

When you make a down payment to compress the loan amount itself, the monthly repayment amount decreases almost in proportion to the loan amount. If the mortgage repayment amount is relatively light during the period when education expenses are in full swing, that much more leeway is created in managing household finances. For households where the peaks of education expenses and mortgage repayments are likely to overlap, this difference is relatively larger.

Effect of reducing total interest

If you reduce the loan amount, the total amount of interest paid over the entire repayment period will also decrease. For example, assuming a loan with an interest rate of around 1.5% to 2% per year and a 35-year repayment period, if you reduce the loan amount by 5 million yen, the total interest paid will be approximately 1.4 to 2 million yen less by simple calculation (author’s estimate; actual amounts vary depending on interest rate type, repayment method, and period). The effect of a down payment manifests in the form of “future interest paid decreases” in exchange for “current cash on hand decreasing”.

Impact on screening pass rate and interest rate preferential treatment

The higher the ratio of your own funds, the more advantageous it may be in financial institution screenings. There are also products where the interest rate itself decreases by putting down a certain percentage or more as a down payment, such as the interest rate by loan ratio for Flat 35 mentioned above. Since screening criteria and preferential conditions differ depending on the financial institution, specific conditions must be confirmed individually.

Disadvantages and risks—pitfalls of increasing the down payment

A “checkmate” scenario due to loss of liquidity on hand

If you increase the down payment too much and your cash on hand is depleted, you will fall into a state where you have no funds to deal with when unexpected expenses (salary reduction, medical expenses, breakdown of home appliances/equipment, early occurrence of education expenses, etc.) overlap after purchasing a home. Once you take out a mortgage, you cannot easily withdraw the funds you put in as a down payment. The lack of liquidity on hand does not surface in normal times, but it becomes apparent when the household budget is in its most difficult phase.

Risk that asset value will decrease even if a down payment is made

Even if you make a down payment and increase your own fund ratio, if the property price itself falls in the future, the loan balance may exceed the appraised value of the property. This relationship is expressed by the loan-to-value (LTV) ratio (the ratio of the loan amount divided by the property price). While making a large down payment is advantageous in terms of screening and interest rates, it does not eliminate the risk of property price fluctuations itself.

Costs of borrowing for education expenses later

If you prioritize a down payment and leave your cash on hand for education expenses thin, there is an option to cover the shortfall with an education loan or scholarship when entering higher education. The interest rate for the Japan Finance Corporation’s general education loan (national education loan) is 4.60% per year (fixed interest rate) (Japan Finance Corporation “General Education Loan (National Education Loan)”). This level is higher than the aforementioned Flat 35 mortgage interest rate (for November 2026, 3.810% per year for a loan ratio of 90% or less), and if you procure education expenses through borrowing later, it may cost more than a mortgage. The interest rate for the Japan Student Services Organization’s Type 2 scholarship (interest-bearing loan type) is determined at the time the loan ends, and for those who finished their loan in September 2026, it was 3.000% per year for the fixed interest rate method and 2.400% per year for the interest rate review method (for the basic monthly amount) (Japan Student Services Organization “Trends in Loan Interest Rates”). For both methods, the upper limit of the interest rate is 3.0% per year (Japan Student Services Organization “Calculation Method for Interest and Interest Rates of Type 2 Scholarships”).

The turning point of judgment—which to prioritize depends on “family circumstances”

Conditions for families where it is easy to decide to increase the down payment

Families who have sufficient surplus in their cash on hand and will still have a certain amount of emergency reserve funds left after using it as a down payment, or families where the time for education expenses to occur is still far off and have time to rebuild savings after making the down payment, tend to be compatible with the choice of increasing the down payment.

Conditions for families where it is easy to decide to leave funds for education expenses

Families where the time for education expenses to occur is near, or who are considering options where expenditure amounts are difficult to predict, such as private school enrollment, or families in occupations with large fluctuations in household income, tend to be compatible with the choice of keeping the down payment low and leaving more cash on hand.

How to set a guideline for “funds you want to keep on hand at a minimum”

Before deciding on the amount of the down payment, there is a way to think in the order of first grasping the emergency reserve funds equivalent to several months of living expenses and the education expenses that are highly likely to be needed in the next few years separately, and then deciding the upper limit of the amount that can be allocated to the down payment. Since the criteria for specifically how much to leave depends on family structure, income stability, and the age of children, it cannot be shown as a uniform amount.

Summary

Should you make a down payment or save for education expenses? The answer changes depending on the future movements of interest rates and prices, so it cannot be decided as one thing.

With that in mind, I believe that for now, it is better to keep the down payment as low as possible and prioritize keeping cash on hand.

One reason is that money borrowed later is likely to be more expensive. As seen in this article, the interest rate for the national education loan is 4.60% per year, which is higher than the 3.810% per year for Flat 35 (November installment, loan-to-value ratio of 90% or less). If you run short on education funds after buying a home, there is no guarantee you will be able to borrow at the same interest rate as a mortgage.

Another reason is that household budgets while raising children are subject to unpredictable expenses, such as those for higher education, illness, or changes in employment. If you have cash on hand, you retain the options available to you at that time.

Of course, if you reduce the down payment, your loan amount will increase, and the burden of repayment will also grow if interest rates rise. That is precisely why this is a perspective based on the premise of “current conditions”; if interest rates or your household financial situation change, you can re-evaluate, including the possibility of early repayment. I believe that being able to leave that room for maneuver is one of the benefits of having cash on hand.

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Sources

Japan Housing Finance Agency, “Latest Interest Rate Information: Long-term Fixed-rate Mortgage [Flat 35]” https://www.simulation.jhf.go.jp/flat35/kinri/index.php/rates/top
Japan Housing Finance Agency, “Survey on the Actual Conditions of Mortgage Users [Mortgage User Survey (January 2026 Survey)]” https://www.jhf.go.jp/files/topics/4955_ext_99_2.pdf
Bank of Japan, “On the Conduct of Monetary Policy” https://www.boj.or.jp/mopo/mpmdeci/mpr_2026/k261030a.pdf
Bank of Japan, “On the Change in the Guideline for Market Operations” https://www.boj.or.jp/mopo/mpmdeci/mpr_2026/k260918a.pdf
Bank of Japan, “Outlook for Economic Activity and Prices (October 2026) The Bank’s View” https://www.boj.or.jp/mopo/outlook/gor2610a.pdf
MUFG Bank, “Mortgage Interest Rates” https://www.bk.mufg.jp/kariru/jutaku/yuuguu/index.html
MUFG Bank, “On the Revision of the Short-term Prime Rate” https://www.bk.mufg.jp/news/news2026/pdf/news0918.pdf
Ministry of Education, Culture, Sports, Science and Technology, “FY2023 Survey on Children’s Educational Expenses” https://www.mext.go.jp/b_menu/toukei/chousa03/gakushuuhi/kekka/k_detail/mext_00002.html
Japan Finance Corporation, “Educational Loan (National Education Loan)” https://www.jfc.go.jp/n/finance/search/ippan.html
Japan Student Services Organization, “Trends in Lending Interest Rates” https://www.jasso.go.jp/shogakukin/about/taiyo/taiyo_2shu/riritsu/2007ikou.html
Japan Student Services Organization, “Calculation Method for Interest and Interest Rates of Type 2 Scholarship Loans” https://www.jasso.go.jp/shogakukin/about/taiyo/taiyo_2shu/riritsu_santei.html