In the Era of 1.25% Interest Rates, What People Repaying Home Loans with Variable Rates Must Absolutely Be Careful About｜AsuPlus アス・プラス 海外口座の …
Article Summary
On September 18, the Bank of Japan raised its policy interest rate to 1.25%. Even so, the repayment amount for variable-rate loans has not changed by even one yen for many households. This is because of the ‘5-year rule.’ However, in the case of Mr. Murase, who borrowed 50 million yen seven years ago at 0.475%, the monthly interest has already nearly doubled. The reduction of the principal is slowing down, and the bill will arrive all at once in October 2029. We will organize the five types of people who will be in trouble, and the correct order of deposits, early repayment, fixing rates, and diversification.
Characters
Mr. Takashi Murase (53) Department manager at a major construction company. Purchased a condominium in Tokyo in the autumn of 2019, borrowing 50 million yen over 35 years at a variable interest rate of 0.475%. Scheduled to finish repayment at age 81. Financial assets are approximately 34 million yen (of which 26 million yen is in yen deposits). After hearing the news of the rate hike, he made an appointment, waited three weeks, and today is his first visit.
Ms. Ryoko Hasegawa (56) Medical office manager. Last time, she took home instructions on how to create a household balance sheet. Her husband’s retirement is four years away. She is worried about the loan of her daughter’s couple, who bought a house two years ago, and is visiting again after waiting two weeks.
FP Tairaku Representative of AsuPlus. An independent financial planner specializing in overseas accounts and currency diversification. 25 years of investment experience. Does not sell financial products and operates the office solely on consultation fees.
※The case studies are fictional characters reconstructed based on multiple consultation contents.
1. The week after the rate hike, ‘The repayment amount hasn’t changed by even one yen’
Murase: Teacher, I heard the Bank of Japan raised interest rates, so I hurriedly checked my bankbook. However, the withdrawal amount for my home loan hasn’t changed by even one yen from seven years ago.
FP Tairaku: It remains at 129,241 yen, doesn’t it.
Murase: Yes. While waiting for three weeks, I started to think I might have been a bit dramatic.
FP Tairaku: You were not being dramatic. First, let’s organize the facts. On September 18, the Bank of Japan raised the policy interest rate from 1.0% to 1.25%. This is the highest level since 1995, and it has been only three months since the rate hike in June. In response to this, Mitsubishi UFJ Bank announced that it would raise the short-term prime rate, which is the benchmark for variable interest rates, from 2.375% to 2.625% starting November 2. On the same day, the three mega-banks announced that they would raise ordinary deposit interest rates from 0.4% to 0.5%.
Hasegawa: I am grateful that deposit interest rates are rising, but.
FP Tairaku: I will talk about that later with numbers. Fixed interest rates are also rising. The interest rate for Flat 35 in September is 3.46%, which is the highest ever under the current system.
Mr. Murase, the reason your repayment amount hasn’t changed is not because there is no impact. It is because of a mechanism called the ‘5-year rule’ that makes the impact invisible.
2. Even if the repayment amount is the same, the interest has already doubled
FP Tairaku: Many variable-rate home loans have a ‘5-year rule’ where the repayment amount does not change for five years even if interest rates rise. What changes is the composition of the repayment amount, in other words, the ratio of interest to principal.
※Calculations based on a 50 million yen loan, 35 years, equal principal and interest repayment, a 2.0% preferential margin, and a general interest rate review schedule. Actual interest rates and timing vary depending on the financial institution and contract.
Murase: …Even though it’s the same 129,000 yen, the interest has nearly doubled.
FP Tairaku: By next summer, more than 40% of your repayment amount will be interest. What happens when the reduction of the principal slows down? As of September 2029, about 1.54 million yen more in principal will remain than originally planned.
Hasegawa: That is the ‘debt for which the bill has not yet arrived’ that I heard about last time.
FP Tairaku: That is correct. The 5-year rule only delays the timing of payments; it does not reduce the amount billed. In terms of a household balance sheet, it is a state where ‘invoices for interest not yet arrived’ are piling up in the liabilities section.
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3. The invoice arrives in October 2029—Simulations based on 3 scenarios
FP Tairaku: In Mr. Murase’s contract, the next time the repayment amount will be reviewed is October 2029. The billing amount will be determined by the interest rate at that time. Private sector forecasts center on two more rate hikes (December 2026 and June 2027) as the main scenario.
※The total interest is a simulation assuming the interest rate for each scenario continues until the loan is paid off.
Murase: Even in the most optimistic scenario, interest increases by 7.61 million yen…
FP Tairaku: There is another rule, the ‘125% rule.’ It is a regulation stating that the revised repayment amount can only be increased up to 1.25 times the previous amount. Scenarios B and C hit this cap.
Hasegawa: If there is a cap, isn’t that a relief?
FP Tairaku: The portion that could not be paid due to the cap does not disappear. It is deferred to the next review or the final payment. However, for the sake of fairness, I must state this: ‘Unpaid interest,’ where interest exceeds the repayment amount, will not occur for Mr. Murase’s balance until the applied interest rate exceeds approximately 3.8%. There is no need to rush to sell anything now.
The real problem is that the principal is not decreasing as planned. **The balance at age 60, compared to the initial plan of approximately 31 million yen, will be approximately 33 million yen in Scenario A and 33.8 million yen in Scenario B.** Even if you put in the entire 22 million yen retirement bonus, about 11 million yen will remain.
Murase: I intended to settle it with my retirement bonus. So I will end up paying until I am 81.
4. Deposits +0.1%, Loans +0.25%—The ‘asymmetry’ of rate hikes
Murase: But sir, I have 26 million yen in savings. If deposit interest rates also rise, won’t that offset it?
FP Tairaku: That is the point I most want to convey today.
**With this rate hike alone, payments will increase by about 100,000 yen per year, while receipts will only increase by about 20,000 yen per year.** Deducting that, it is an out-of-pocket expense of 80,000 yen per year.
Comparing March 2024, when negative interest rates were lifted, with next July, when this rate hike will be reflected in repayments, the loan interest rate has risen by 1.15 points and the deposit interest rate by 0.499 points. Calculating with the current balance, loan interest increases by about 470,000 yen per year, while deposit interest only increases by about 100,000 yen per year after tax.
Hasegawa: Hearing about deposit interest rates for the first time in 34 years, I felt like I was gaining something.
FP Tairaku: Banks raise the interest rates they charge by more than the interest rates they pay on deposits. **The people who benefit from rate hikes are not those with large deposits. It is those whose increase in interest received exceeds the increase in interest paid.** Moreover, the yen ordinary deposit rate is 0.398% after tax. It hasn’t even reached the August Consumer Price Index (+1.9% year-on-year).
▶ I have organized the details regarding real interest rates on yen deposits here.
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5. Some people receive bills immediately──Pair loans and parental assistance
Hasegawa: Doctor, I came here today to talk about my daughter. Two years ago, the couple bought a condo with a 70 million yen pair loan. It was a variable rate from an online bank, starting at 0.38%. Last month, I got a call saying their repayment amount had gone up.
FP Tairaku: Some online banks offer products that have neither the 5-year rule nor the 125% rule. In that case, **interest rate adjustments are reflected directly in the repayment amount every six months.** Unlike Mr. Murase, this is the type where the bill arrives immediately.
The repayment amount for your daughter and her husband was about 178,000 yen per month combined at the time of borrowing. If the interest rate reaches 1.25%, it will be about 204,000 yen, and if it rises another 1% to 2.25%, it will be about 236,000 yen.That is an increase of 58,000 yen per month from the start, or about 700,000 yen per year.
Hasegawa: So, I was thinking of using about 10 million yen from my savings to help them make an early repayment.
FP Tairaku: I understand your feelings well. However, **if you get the order wrong, you will be taxed.** If a parent pays off a child’s home loan, it is considered a gift in principle. If you gift 10 million yen at once, the gift tax will be approximately 1.77 million yen.
Hasegawa: I heard that gifts for housing funds are tax-exempt.
FP Tairaku: That is the “Tax Exemption for Gifts of Funds for Housing Acquisition.” That applies to funds for acquiring a home, and it cannot be used to repay a loan that has already been taken out. The application deadline is also December 31, 2026. If you had consulted me before the purchase, there might have been a possibility of using it.
Hasegawa: …I was two years too late, then.
FP Tairaku: It is not that there are no options. You could gift it over several years, use the inheritance tax settlement system, or leave a contract and repayment record as a loan between parent and child. Which is appropriate depends on your family’s situation, so please be sure to check with a tax accountant before executing it. What I want to say is that the result of assistance changes significantly depending on ‘when’ and ‘in what form’ rather than ‘how much’.
6. Five types of people who will be troubled by the Bank of Japan’s interest rate hike
FP Tairaku: If we organize what the two of you have said, the following five types of people will be in trouble.
Conversely, people who have borrowed with a fixed rate for the entire period or those with a small balance and only a few years left until full repayment will hardly be affected by this interest rate hike. Those who have no debt and have a lot of savings are actually on the side that will benefit.
7. Countermeasures are determined by ‘order’──Protect, Reduce, Fix, and Divide
Murase: Then, what should I do? If I pay it off in a lump sum with my savings, will that be the end of it?
FP Tairaku: The loan issue will end, but another problem will begin. There is an order to countermeasures.
① Protect: Do not use 1-2 years’ worth of living expenses for early repayment Money used for early repayment can never be withdrawn again. Even if your income stops due to illness or changing jobs, monthly repayments will continue. First, secure your yen deposits on hand as an emergency fund for living expenses.
② Reduce: Evaluate early repayment as a “guaranteed return” If you make an early repayment of 10 million yen on a loan with an applicable interest rate of 1.625%, the interest for the first year will decrease by approximately 160,000 yen. If you put the same 10 million yen into a regular savings account, the interest after tax would be about 40,000 yen. **Early repayment has the same effect as an investment with a 1.6% annual return that is principal-guaranteed and tax-free.** Looking at the numbers alone, it is clearly more advantageous than a savings account.
However, there are two points that are easy to overlook. One is that the coverage of your Group Credit Life Insurance (GCLL) will also decrease accordingly. The balance of a home loan is a debt that disappears through insurance in the event of an emergency. Early repayment has the aspect of reducing that insurance coverage yourself. The other point is that during the period you are receiving the home loan tax deduction, you should make a decision only after comparing the deduction amount with the interest.
③ Secure: Calculate the “peace of mind premium” when refinancing to a full-term fixed rate The interest rate gap between variable and fixed rates is currently at its widest level in history. If Mr. Murase refinances his remaining balance of approximately 40.9 million yen over the remaining 28 years at a fixed rate of 3.46%, his monthly repayment will be about 190,000 yen. **This is an increase of about 61,000 yen per month compared to now.** This is a decision to pay this amount reliably in exchange for eliminating anxiety. Refinancing also involves various fees and term limitations based on age. For those with little room in their household budget, a “mix” plan that fixes only a portion is also an option.
④ Diversify: Consider the currency of your remaining surplus funds Only after finishing steps ① through ③ and if you still have surplus funds remaining, should you consider in which currency to hold a portion of them.
Murase: US dollar interest rates are near 4%, right? Wouldn’t it be more profitable to invest in foreign currency while paying off the loan?
FP Tairaku: That calculation **does not include exchange rate risk.** If the yen strengthens, the interest rate gap will easily disappear. Therefore, I do not recommend the approach of “it is profitable if you invest at a higher interest rate than the loan.”
What I want to say is something else. **If you use all 26 million yen in savings for early repayment, Mr. Murase’s assets will consist almost entirely of “yen-denominated real estate” and “yen-denominated pension.”** It is a decision to turn yen cash into a yen-denominated house. Reducing yen-denominated debt and diversifying the currency of your assets are things that should be decided separately.
▶ Click here to see why funds are moving overseas from Japan, where interest rates have risen.
8. [Self-Assessment] Home Loan Interest Rate Hike Checklist
FP Tairaku: I have made it so you can check this at home. Please mark the items that apply to you.
□ 1. I cannot immediately answer what type of home loan interest rate I have (variable, fixed-period selection, or full-term fixed)
□ 2. I do not know if my contract includes the “5-year rule” or “125% rule”
□ 3. I do not know when my repayment amount will be reviewed next
□ 4. My scheduled completion date for repayment is past the age of 70
□ 5. I am calculating my retirement funds on the assumption that I will pay off the loan in a lump sum with my retirement bonus
□ 6. I have never checked how much of my monthly repayment is currently interest
□ 7. I have never simulated what my repayment amount would be if interest rates rose by 1%
□ 8. I think interest rate hikes are a plus for me because deposit interest rates have risen
□ 9. I have never thought about the fact that early repayment also reduces my GCLL coverage
□ 10. I plan to assist my children’s household with their loan, but I have not consulted a tax accountant
Assessment
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0 to 2 items: You are well prepared. Checking your repayment schedule once a year is sufficient
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3 to 5 items: **Caution required.** The impact is already underway, even if it is not yet visible
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6 or more items: **Red alert.** Before the next review, you need to organize your repayment plan and asset allocation all at once
Murase: It was 7 items. I had never even thought about numbers 2 and 3 until today.
Hasegawa: For me, it’s number 10. I wish I had known this before my daughter called.
9. Use the 3 years where the repayment amount does not change to prepare
FP Tairaku: Murase-san, the 5-year rule is not a bad system. It is a mechanism that prevents sudden increases in burden and gives you time to prepare. The problem is spending that time thinking that “nothing is happening.”
Murase: That’s 3 more years until October 2029.
FP Tairaku: Yes. During those 3 years, decide how much to keep on hand, how much to pay back, and in which currency to hold the remainder. If you decide on the order, you won’t have to panic on the day the bill arrives.
Those who open the bill can take action.
Tonight, please take out your repayment schedule and look at the “interest” column. That amount is the interest rate hike bill that your loan has already received.
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