[Medical Professionals × Money #221] Is the '5-Year Rule' for Home Loans Really Safe? Calculating Repayment Amounts When Interest Rates Rise

When taking out a home loan,

have you ever thought, ‘I’m afraid of interest rates rising with a variable rate loan’?

While researching home loans myself, I learned about terms like the ‘5-year rule’ and the ‘125% rule’.

But at first, I honestly didn’t understand them well.

So, this time, I’ll try to think about it as simply as possible.

What is the 5-year rule?

Simply put, it is a mechanism where

even if interest rates rise, the monthly repayment amount does not change immediately.

For example, suppose you borrow 30 million yen over 35 years at an interest rate of 0.5%.

What happens if the interest rate subsequently rises to 1%, 2%, or 3%?

If there is a 5-year rule, the monthly repayment amount will not change immediately even if the interest rate rises.

Then, what changes?

It means that ‘the proportion of the repayment allocated to interest increases’.

In other words,

interest rates rise

↓
interest increases
↓
the amount allocated to the principal decreases
↓
the home loan balance becomes harder to reduce.

It’s easier to understand when you look at the numbers

Assuming a 30 million yen loan over 35 years with an initial interest rate of 0.5%, let’s assume that interest rate continues for 5 years.

If there is a 5-year rule, the principal reduced over 5 years will look like this.

At a 1% interest rate, the principal decreases by about 3.25 million yen over 5 years.

However, at a 2% interest rate, it’s about 1.76 million yen.

At 3%, it’s only about 190,000 yen.

In other words,

the higher the interest rate, the harder it is for the principal to decrease even with the same repayment amount.

This is the point of the 5-year rule.

What happens if interest rates rise further?

What’s even scarier is what happens after that.

If interest rates rise further,

the ‘monthly interest’ can become larger than the ‘monthly repayment amount’.

When this state is reached, the principal does not decrease even though you are making repayments.

In fact, the principal may even increase.

In this calculation, this state is reached when the rate exceeds approximately 3.12%.

This is the so-called ‘dead zone’. However, this is just a simulation based on these conditions.

In actual home loans, the mechanism differs depending on the financial institution and the contract details.

What happens if there is no 5-year rule?

So, what happens if there is no 5-year rule?

If interest rates rise, the repayment amount is recalculated each time.

Therefore,

the monthly repayment amount increases.

On the other hand, the principal decreases steadily.

For example, with 30 million yen, at a 3% interest rate, the principal decreases by about 2.62 million yen over 5 years.

With the 5-year rule, it was about 190,000 yen.

That is a very large difference.

Which is ‘better’?

This is a difficult point.

With the 5-year rule,

you can suppress the monthly burden immediately after an interest rate hike.

This is a merit.

But because of that,

the principal becomes harder to reduce.

In other words,

‘it’s safe because there’s a 5-year rule’

is not necessarily true.

It is a mechanism to prevent the monthly repayment amount from increasing suddenly, but it does not eliminate the impact of the interest rate hike itself.

Don’t think about home loans only in terms of ‘how much per month’

When thinking about home loans,

‘how much is the monthly repayment?’

is sometimes all people look at.

I was like that too before.

But what you really should look at is,

‘as a result of continuing those repayments, how much has the principal decreased?’

That might be the point.

Especially if you choose a variable interest rate,

・What happens if interest rates rise? ・Is there a 5-year rule? ・Is there a 125% rule? ・How much will the principal decrease? ・Can the household budget withstand it if interest rates rise further?

I think it is important to think this far ahead.
A home loan is a large debt that you will live with for decades.
I want to think not only about the ‘current repayment amount’ but also about

‘what will happen to my household budget when interest rates rise?’

I felt that way again after making this table.