Interest Rate Movements Part 2: How Will the Bank of Japan's Rate Hikes Affect Home Loans?

An easy-to-understand explanation of interest rate trends from 2024 to 2026 and the impact on ‘variable interest rates’
If the Bank of Japan raises interest rates, will home loan interest rates also rise?
For those looking to purchase a home, ‘rising interest rates’ have become a particular concern recently.
Since 2024, the Bank of Japan (BOJ) has shifted away from its long-standing low-interest-rate policy and has been proceeding with interest rate hikes.
So, what kind of impact will the BOJ’s rate hikes have on actual home loans?
In this article, we will explain as clearly as possible the changes in the Bank of Japan’s monetary policy from 2024 to 2026 and the ‘short-term prime rate’ (short-term prime), which is related to variable interest rates for home loans.

1. First, let’s confirm the trend of the BOJ’s rate hikes
Since 2024, the BOJ has been raising its policy interest rate in stages.
The BOJ’s policy interest rate and its impact on home loans
Period
Key BOJ actions
Policy rate benchmark
Impact on home loans
〇 March 2024
Negative interest rate policy ended
Around 0 to 0.1%
Long-standing extraordinary easing ended
〇 July 2024
Additional rate hike
Around 0.25%
Upward pressure on bank short-term interest rates
〇 January 2025
Additional rate hike
Around 0.50%
Short-term prime rate also rises
〇 December 2025
Additional rate hike
Around 0.75%
Impact on home loan variable rates
〇 June 2026
Additional rate hike
Around 1.00%
Potential for further rise in short-term prime rate
〇 September 2026
Additional rate hike
Around 1.25%
Impact on variable rates draws further attention

In other words, we must consider that we are gradually shifting from the environment where low interest rates were the norm to an era where interest rates will rise.

2. What determines the “variable interest rate” for home loans?When considering variable interest rates for home loans, what is important is the

“short-term prime rate (short prime).” Simply put, the short-term prime rate is one of the benchmark interest rates used by banks when they provide short-term loans to companies and others.
While the mechanism for variable home loan interest rates varies by financial institution, they are influenced by the movements of these short-term interest rates.
Therefore, the flow is as follows:

The Bank of Japan raises the policy interest rate
↓The bank’s short-term funding environment changes
↓
The short-term prime rate rises
↓
The home loan benchmark rate is also affected
↓
Variable rate home loans are also affected

.
It does not mean that “because the Bank of Japan raised rates by 0.25%, home loans will definitely rise by 0.25%,” but because benchmark rates, preferential margins, and interest rate review periods differ by financial institution, the actual impact on home loans must be checked for each bank.
However, you can assume that most banks, including city banks, are linked to it.
City banks have not yet responded to this September 0.25% rate hike, meaning the 0.25% will be applied later at a staggered time. Internet banks have already reflected it.

3. What happens to home loans when the “short prime” rises?

Depending on the product, home loans may have mechanisms called the “5-year rule” or the “125% rule.”
4. What is the “5-year rule”?

The 5-year rule is a mechanism for variable rate home loans with equal principal and interest repayment where, even if the interest rate changes, the monthly repayment amount is basically kept fixed for 5 years.
This is because it would be difficult if it changed every month.However, this does not mean that “the burden will not increase even if interest rates rise.”Even if the repayment amount does not change,
the proportion of “interest” within the repayment amount increases, and the rate at which the principal decreases slows down.

For example, what was previously “100,000 yen monthly repayment → 80,000 yen principal + 20,000 yen interest” could change due to an interest rate hike to “100,000 yen monthly repayment → 70,000 yen principal + 30,000 yen interest,” meaning the content changes even though you are repaying the same 100,000 yen.
In other words, monthly repayment amount does not change = the burden of the home loan does not change

is not necessarily true.

5. What is the “125% rule”?

For home loans to which the 5-year rule applies, a “125% rule” may be set when reviewing the repayment amount.
This is a mechanism where, even if the repayment amount increases due to an interest rate hike,
the new repayment amount is kept from exceeding 125% of the previous repayment amount.
For example, if the current monthly repayment amount is 100,000 yen, the idea is that the repayment amount after the review will be capped at 125,000 yen in principle.
However,
the 5-year rule and 125% rule are not systems common to all home loans.
Since handling differs by financial institution and home loan product, it is important to check the terms of the home loan you have contracted.

6. The reason why “repayment amount doesn’t change, so I’m safe” is not true
This is a particularly important point for those using variable rate home loans.
Even if interest rates rise, the monthly repayment amount may not change immediately due to the 5-year rule, etc.
However, you are still being affected by the interest rate hike during that time.If the proportion of interest increases, effects such as: · The speed at which the principal decreases slows down· The loan balance becomes harder to reduce than planned
· The future repayment burden may increase
can be expected.
Therefore, when considering a variable rate home loan, it is important to think not only about the “current repayment amount” but also about “what will happen to the household budget if interest rates rise.”

7. Things to check for those who will purchase a home from now on

Those who are thinking about purchasing a home in the future should not judge simply because “variable interest rates are cheap,” but should also consider the possibility of interest rate hikes when planning their finances for peace of mind.
Things to check in particular are the following four:

① Current applicable interest rateLet’s check what the percentage of your current home loan is.
② Benchmark interest rate
Check how the benchmark interest rate set by the financial institution is determined.
③ Repayment amount if interest rates rise

For example, if the interest rate increases by +0.5%

if the interest rate increases by +1.0%
etc., simulating multiple cases will make it easier to visualize the impact on your household budget.
④ Presence of 5-year rule/125% rule
Do not assume that “my home loan also has a 5-year rule,” but check the product details of the financial institution you are contracting with.

I think it is important to compare carefully and choose a home loan.
I cannot say which bank is recommended, but it is important to check carefully with the sales representative, and you can also research the contents of group credit life insurance yourself, so I think it is important to compare.
There are also products available such as group credit life insurance for couples and products where the home loan is waived if you are diagnosed with cancer.

I hope this was helpful.

See you next time.

※ This article explains general information about home loan interest rates and does not recommend the use of any specific financial institution or home loan product. Please check the latest information from each financial institution regarding actual interest rates and repayment conditions.