Mortgage interest rates have risen this much in half a year. What I am thinking as a property owner with a variable rate mortgage

Entering October, mortgage interest rates have risen across the board. The trigger was the Bank of Japan’s decision on September 18 to raise the policy interest rate to 1.25%. The policy rate has continued to rise every three to six months, from 0.75% last December to 1% this June.

I personally own two studio apartments in Tokyo with variable rate mortgages. Today, I looked into how much interest rates have risen and what happens to those who have borrowed.

How much has it risen in half a year?

The extent of the increase compared to April of this year is summarized as follows.

While variable interest rates at megabanks are still in the low 1% range, the rise in fixed interest rates and rates at online banks is significant, reaching levels not seen in the past few years. It can be said that we have entered a stage where we should be thinking not about “whether interest rates will rise,” but “how much they will rise.”

If it rises by 0.25%, how much will repayments increase?

For example, if you borrowed 30 million yen with a 35-year mortgage, if the interest rate rises from 0.95% to 1.20%, your monthly repayment will go from approximately 84,000 yen to approximately 87,500 yen. This is an increased burden of about 3,500 yen per month, or about 42,000 yen per year.

Some may feel this is “smaller than expected.” However, this is just for this 0.25% increase. If interest rate hikes continue, these amounts will accumulate.

Beware of the “no immediate increase” mechanism of variable interest rates

Many variable interest rate loans have mechanisms called the “5-year rule” and the “125% rule.”

• 5-year rule: Even if interest rates rise, the monthly repayment amount remains unchanged for 5 years

• 125% rule: Even if the repayment amount is reviewed after 5 years, it will not increase to more than 1.25 times the previous amount

At first glance, this seems like a lenient mechanism, but there is a point to be aware of. Even while the repayment amount remains the same, the interest is increasing. In the 30 million yen example mentioned earlier, the interest for the first month increases from approximately 23,750 yen to approximately 30,000 yen. If the repayment amount is the same, the principal decreases that much more slowly.

In other words, “monthly repayment amount remains the same” does not mean “there is no impact.” Unpaid interest is deferred, and there is a possibility that the burden remaining at the end will become larger.

In my case

I am also concerned about rising interest rates. However, interest rates are not something I can control no matter how hard I try.

Therefore, what I am thinking is to just do what I can. One thing I can do as a property owner is to review the rent. If prices are rising and the surrounding market rent is also rising, there is room to negotiate a rent increase at the time of a tenant’s lease renewal.

The most important thing I have valued when choosing properties is “location.” If it is close to the station and in a place where many people want to live, it is easier to find tenants even if the rent is raised slightly. In a phase where interest rates are rising, I am feeling once again the importance of this “location is everything” mindset.

To those borrowing with a variable interest rate

No one can accurately predict the movement of interest rates. That is precisely why I believe it is important to focus on what you can change rather than worrying about what you cannot.

• Check the interest rate of your loan and the timing of your next review

• Look not only at the repayment amount but also at how the remaining principal is decreasing

• Know the options available to you, such as early repayment or refinancing

Whether it is a home loan or an investment loan, simply reviewing your contract once should help you take the news of the next interest rate hike in stride.