Home Loans: Why I Make Variable Rates My First Choice. What's More Important Than 'Interest Rate Predictions'
Home loans: Variable or fixed, which is better? What to think about before ‘interest rates’
In this note, a mysterious creature named ‘Mon-chan’ and its owner—who holds a CFP certification, is a securities analyst, and has practical experience as an institutional investor—think about finance in a semi-conversational format!
Me ‘What are you doing, Mon-chan?’
Mon-chan ‘I want a house… and after thinking about it so much, I just melted.’
Me ‘(That was sudden…) I could manage to DIY a doghouse, but…’
Mon-chan ‘No! I want a 50-tsubo single-story house with a garden and a built-in garage from Sekisui or Sumitomo Forestry!’
Me ‘Excuse me… But Mon-chan, you’re unemployed, right? How are you going to get a home loan?’
Me ‘(He makes this face whenever things get inconvenient.) Fine, fine, so you mean I’m the one taking it out. Well, this rental doesn’t allow pets, so I’ll think about it. But 50 tsubo and a built-in garage is really…’
Mon-chan ‘Thank you! And so, if I’m going to get a home loan, I’m torn between a variable rate and a fixed rate! Owner, you’re an expert on that stuff, right? Tell me, tell me!’
Me ‘…………’
Think about your own income and assets rather than predicting interest rates
When taking out a home loan, the question many people struggle with is,
‘Variable rate or fixed rate, which is better in the end?’
This is the problem.
Rather than predicting what interest rates will do, I suggest choosing based on the following criteria:
You expect continued wage increases and raises, and you also plan to invest in stocks.
→ Variable rate
Your workplace is not proactive about wage increases or raises, and you don’t expect them in the future. You also have no particular plans to invest in stocks.
→ Fixed rate
Of course, it also depends on your age, years of employment, and lifestyle.
Even so, I believe it is more rational to choose based on your own income and assets rather than deciding whether interest rates are likely to rise based on ‘almost pure intuition’.
Mon-chan ‘But hey, everyone is saying that variable rates are still going to go up, right?’
Me ‘That’s true. In fact, the Bank of Japan has hinted at accelerating the pace of rate hikes, so it does look like variable rates will continue to rise for a while.’
Mon-chan ‘So there are still cases where a variable rate is better?’
Me ‘Yes. Even if variable rates rise, as long as they don’t reach the level of fixed rates, a variable rate is still better, right?’
*As of September 2026: Variable rate around 1.25%, fixed rate around 3.45%.
Mon-chan ‘I see… then, can’t you predict that?’
Me ‘It’s impossible to predict accurately. In fact, when the rate hikes first started, everyone said they would only go up to about 1.5%, but now there are even opinions that they could hit 2.5% or higher.’
Mon-chan ‘So the conclusion remains elusive… endless flame wars continue on X, and peace never comes to the warriors…’
Me ‘(Does this guy actually get into flame wars…) That is exactly why you have to choose what suits you, under the premise that interest rates cannot be accurately predicted.’
Mon-chan ‘I don’t get into flame wars!’
Me ‘!?’
Why predicting interest rates is difficult
One thing to consider is the
‘Interest rates are likely to rise, so I’ll choose a fixed rate’
way of thinking.
It seems plausible at first glance, but since fixed rates are influenced by market rates, the future interest rate hikes expected by market participants are already reflected to some extent in current fixed rates.
Therefore, if you are really thinking about ‘which is more profitable,’ you need to consider not just whether interest rates will rise, but
whether interest rates will rise more than what is already priced into current fixed rates.
you have to think about.
This is quite difficult.
Even professional institutional investors cannot accurately predict future interest rates consistently. Much less is it realistic to forecast 35 years ahead.
That is precisely why I believe it is better not to turn choosing a home loan into an ‘interest rate forecasting game’.
Mon-chan: ‘So predicting interest rates is that hard… Even though you have a Level 1 Financial Planner certification, a Securities Analyst qualification, and practical experience as an institutional investor, it’s still difficult for you?’
Me: ‘Thanks for the natural introduction. Some people say things that sound plausible, but at the end of the day, it’s just their own prediction, and they won’t take responsibility if they’re wrong.’
Mon-chan: ‘Even so, what did you mean earlier by “choosing based on your own income and assets”?’
Me: ‘I’m glad you asked. This is where we get to the main point.’
Considering the economic situation when interest rates rise
The risk of a variable interest rate is that the interest rate will rise and increase the burden of repayment.
So, let’s also consider the economic situation at that time.
When variable interest rates rise, that is, when the Bank of Japan raises rates, what kind of situation can be expected?
It is exactly like it is now, an economic situation where
prices are rising, stock prices are rising, and wages are being increased
.
What I mean to say is that even if home loan interest rates rise, if there are positives from rising stock prices or wage increases, that increased burden can be offset.
In other words, you can hedge (avoid) the risk of rising interest rates to some extent through your income and assets.
Of course, this economic situation does not necessarily occur during every period of rising interest rates. However, I believe it is highly likely that they will be linked to some extent in the long term.
Therefore, if you choose a variable interest rate, the first thing you should care about is
whether you are likely to benefit from rising stock prices or wage increases
That is what it comes down to.
Specifically,
are points you should check.
Mon-chan “Um, how do I check the general public’s wage growth rate?”
Me “One benchmark is the results of the spring wage negotiations published by RENGO. Looking at the last three years, including regular pay raises, about 5% per year is a good benchmark.”
Mon-chan “I see! Then first, I just need to check if my salary has increased by about 5%! Mon-chan can do that too!”
Me (No, that’s why you’re unemployed)
Me “Ah… sorry… I’ll give you a snack later…”
Fixed interest rates are insurance against rising interest rates
So far, I have discussed how rising stock prices and wage increases can mitigate the burden caused by rising interest rates.
So, how should we think about the meaning of choosing a fixed interest rate?
A fixed interest rate can prevent an increase in the burden caused by future interest rate hikes.
As of September 2026, variable interest rates are around 1.25%, and fixed interest rates for Flat 35 are around 3.45%, a difference of more than 2%.
(Here, variable interest rate is treated as the Bank of Japan’s policy interest rate)
This difference can also be viewed as the cost of being able to hedge against interest rate rise risk with a fixed interest rate.
In other words, a fixed interest rate is like paying an insurance premium against rising interest rates.
Applying this to the previous example, people who can expect continuous wage increases and are also investing in stocks may receive positive effects from their income and assets during a period of rising interest rates.
On top of that, they also pay an insurance premium on their home loan to prepare for rising interest rates.
To me, it seems like people are over-preparing for interest rate hikes.
It is impossible to accurately predict interest rates.
If we start from that premise, isn’t it overkill for someone who can expect gains from rising stock prices or wage increases to bear a interest rate difference of 2% or more just to be prepared?
This is my perspective.
So, what about in a situation where interest rates fall?
Let’s consider the opposite scenario as well.
The economy worsens, stock prices fall, and wage increases stop. In some cases, even wage cuts occur.
This is the kind of recessionary, deflationary phase that Japan has experienced in the past.
If the Bank of Japan cuts interest rates in such a situation, we can expect the burden of a variable-rate home loan to lighten.
While your income and assets may be struggling, the burden on your debt side is eased.
While fixed interest rates provide a hedge against rising rates, they do not allow you to directly benefit from such interest rate drops. While refinancing is an option, it requires costs and procedures, and there is no guarantee you will be able to refinance under the conditions you hope for.
That is why I want to consider my income, assets, and home loan together, including cases where interest rates fall, not just preparing for interest rate hikes.
If you are likely to benefit from wage increases or rising stock prices, choose a variable interest rate and accept the risk of rising interest rates across your entire household budget.
If you are unlikely to receive such benefits, prepare with a fixed interest rate.
Of course, if the fixed interest rate level is higher, you will also need to limit the amount you borrow to an amount you can comfortably repay.
Considering these points, I believe that for most people, it is basically better to take out a variable-rate loan.
Mon-chan ‘I’m tired because there’s so much to think about.’
Me ‘To put it simply, variable rates are cheaper, so I want to go with a variable rate as a baseline, but the question is: are you prepared for interest rate hikes?’
Mon-chan ‘So, it really depends on the person which one they should choose.’
Me ‘That’s right. And whether you choose a variable or fixed rate, I think it’s a good idea to have a financial planner actually run a simulation to see how much you can comfortably repay.’
Mon-chan “Even though you’re a certified Level 1 Financial Planner, you can’t do it?”
Me “I’ve done a rough calculation in Excel, but when it comes to projecting far into the future, it’s safer to have it done at an office with specialized software. Of course, if there’s demand, I’d like to try it.”
Mon-chan “Hmm, you’ve still got a long way to go.”
Me “Ugh…”
Conclusion: If you are prepared for rising interest rates, I would choose a variable interest rate.
Variable or fixed?
If it were me, I would first have a life plan simulation done at an FP office, while considering how my wages are likely to change in the future and how to proceed with asset formation, including stock investments.
In fact, to determine your home loan budget, it would be better to consult an FP before visiting a housing exhibition.
If you can expect continuous wage increases, are making progress with asset formation, and have enough leeway in your household budget to handle interest rate hikes, a variable interest rate is a strong option.
On the other hand, if wage increases are unlikely and it’s difficult to compensate for the increased burden through assets, prepare with a fixed interest rate. And keep the loan amount within a range that you can comfortably repay even at that interest rate.
It is important to make decisions based not only on home loan interest rates but also on your own income and assets.
And above all,
it is more important to “borrow in a way that won’t cause fatal damage regardless of which you choose” than to “guess whether variable or fixed is better.”
A home loan is something you will live with for decades.
You don’t need to perfectly predict interest rates for 35 years.
Even if your prediction is wrong, you can still live normally.
It may be obvious, but I believe that leaving that much leeway is the strongest way to structure a home loan.