To whom and when do mortgage interest rate changes arrive? Differences in how rate hikes reach fixed and variable rates

“If the Bank of Japan raises interest rates by 0.25%, mortgage rates will also rise by 0.25%.” This is an easy-to-understand concept, but in reality, it is not that simple.

Last time, we saw that even when the policy interest rate was 1.25%, 10-year government bonds were in the 3% range, and 30-year and 40-year bonds were around 4%, meaning multiple interest rates exist simultaneously in Japan. The same applies to mortgages. For variable rates, full-term fixed rates, and fixed-period selection types, the interest rates that are easily affected, the timing of reviews, and the speed at which they are reflected in repayment amounts all differ.

This time, we will consider to whom, through which channels, and when interest rate hikes arrive using mortgages as an example.

※Figures are generally based on data published as of September 2026. Since mortgage mechanisms vary by product and financial institution, this explains the general structure. It does not recommend individual borrowing decisions.

There are three destinations where interest rate hikes arrive

When you see news that “mortgage interest rates have risen,” you first need to distinguish whose interest rates are being referred to. Broadly speaking, those affected are people who already have variable-rate loans, people who will borrow at fixed rates in the future, and people reaching the end of a fixed-rate period.

For existing variable-rate loans, interest rate hikes arrive through reviews of the bank’s base rate or applied rate. However, the timing when the interest rate changes does not necessarily coincide with the timing when the monthly repayment amount changes. For those who will borrow at a fixed rate in the future, changes in market interest rates and the procurement environment of financial institutions arrive through newly presented interest rates.

If it is a fixed-period selection type, the interest rate during the fixed period does not change, but at the end of the period, conditions are reset based on the interest rate environment at that time. On the other hand, for those who have already borrowed with a full-term fixed-rate type, the applied interest rate generally does not change until the loan is fully repaid. In other words, even with a single piece of news about “rising mortgage interest rates,” to whom and when it arrives is completely different.

Variable interest rates do not mean “the policy interest rate arrives as is”

For many banks’ variable-rate mortgages, the interest rate actually applied is the base rate set by the bank minus a certain preferential margin. The base rate is typically influenced by short-term interest rate environments such as the short-term prime rate, and as a general flow, it can be thought of as:

BOJ policy interest rate → short-term market interest rate → bank base rate → variable mortgage

Mitsubishi UFJ Bank also explains the flow in which the Bank of Japan’s policy interest rate hike is reflected in the base rate for variable mortgages through a review of the short-term prime rate.

However, this process is not automatic. When and to what extent the base rate is changed depends on the financial institution, and some products use their own unique criteria. Since the preferential margin also differs depending on the product and the time of the contract, it does not mean that everyone’s applied interest rate will rise by 0.25% from the next day just because the Bank of Japan raised interest rates by 0.25%.

And, what is particularly important for variable interest rates is that “interest rate reviews” and “repayment amount reviews” are separate matters.

Even if interest rates rise, there are cases where the repayment amount does not increase immediately.

Some variable-rate mortgage products have a “5-year rule” that keeps the monthly repayment amount fixed for 5 years even if the applied interest rate is reviewed periodically, or a “125% rule” that limits the increase when reviewing the repayment amount to 1.25 times the previous amount.

In the guidance of major banks, it can be confirmed that these are used for variable-rate and principal-and-interest equal repayment, and are not applied to principal-equal repayment. However, this is not a mechanism common to all mortgage products.

What to note here is that the fact that the repayment amount does not change is not the same as not being affected by the interest rate hike. If the applied interest rate rises, the proportion of interest in the monthly repayment amount may increase, and the pace at which the principal decreases may slow down.

In cases where interest rates rise significantly, there are contracts where the monthly repayment amount alone may not cover the interest, potentially leading to unpaid interest. Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho all provide guidance on unpaid interest in such cases.

Conversely, in principal-equal repayment where the principal repayment amount is constant each time, if the interest rate rises, the interest portion increases, so the impact on the repayment amount appears relatively quickly. When looking at a mortgage, you need to look not only at “whether this month’s repayment amount has increased,” but also at the applied interest rate, the breakdown of interest and principal, and the review rules in the contract.

Fixed interest rates are not “immovable rates”

For those who have already borrowed with a full-term fixed rate, the applicable interest rate will, in principle, not change until the loan is fully repaid. However, the fixed interest rate offered to those borrowing for the first time will fluctuate depending on market conditions.

This is because fixed-rate mortgages are more susceptible to medium- to long-term market interest rates and long-term funding environments than variable-rate mortgages.

In the September 2026 Flat 35, the most common interest rate for a loan-to-value ratio of 90% or less and a repayment period of 21 to 35 years was 3.460%. Meanwhile, according to the “Government Bond Interest Rate Information” published by the Ministry of Finance, the 10-year government bond yield as of September 24 was 3.073%, the 20-year was 3.887%, and the 30-year was 4.115%.

Looking at these figures, it is clear that Flat 35 is not determined by a simple formula such as “10-year government bond rate + a certain margin.”

In the Flat 35 purchase program, the Japan Housing Finance Agency purchases mortgage receivables from financial institutions, issues Mortgage-Backed Securities (MBS) using them as collateral, and raises funds from the bond market. Mortgage interest rates are determined by each financial institution based on factors such as the MBS yield.

Therefore, while medium- to long-term government bond rates are an important clue to understanding the interest rate environment, they are not a formula that mechanically determines mortgage interest rates. For fixed-rate mortgages offered by banks, individual funding environments and competitive strategies also play a role.

Furthermore, fixed interest rates can move even before the Bank of Japan actually raises rates. This is because if the market anticipates future policy rates or inflation, medium- to long-term interest rates may move first. When looking at fixed interest rates, it is necessary to check not only “whether the Bank of Japan raised rates at this meeting,” but also how the market views the future as well.

For fixed-period selection types, “when the fixed period ends” is important

For fixed-period selection types, such as “initial 10-year fixed,” the applicable interest rate is fixed during that period. However, once the fixed period ends, the borrower will transition to a variable rate or choose another fixed period based on the conditions at that time. Sumitomo Mitsui Banking Corporation also provides information on its fixed-period selection type (referred to as “fixed-rate special contract type” by the bank), explaining that after the fixed period ends, the loan transitions to a variable rate, and the borrower can choose a fixed rate again based on the conditions at that time.

Therefore, what is important is not just that “it is fine because it is currently fixed.” It is also necessary to look at when the next interest rate review will occur.

How does a 1-point difference affect repayment amounts?

A difference of 1 percentage point in interest rates may seem small.

For example, assuming a loan of 30 million yen over 35 years with equal principal and interest repayments, the monthly repayment would be approximately 99,400 yen at 2% per annum, and approximately 115,500 yen at 3% per annum. The difference is about 16,100 yen per month, or about 193,000 yen per year.

Of course, this is a simple hypothetical calculation excluding fees, taxes, group credit life insurance, and early repayments. However, for loans with large amounts and long terms like mortgages, the impact of a 1-point interest rate difference accumulating over a long period is not small.

Moreover, even with the same 1-point difference, the impact varies depending on whether the interest rate rises when the principal balance is large immediately after borrowing, or after repayment has progressed significantly. Not just the level of the interest rate, but the remaining principal and the timing of the interest rate change become important.

Not “which is more profitable,” but who bears the interest rate risk

So, which is more advantageous, fixed or variable? The answer will be clear in hindsight, but at the time of borrowing, it is impossible to know future interest rates with certainty.

With a full-term fixed rate, you can determine future interest payments at the time of the contract. Even if future interest rates rise significantly, the borrower’s applicable interest rate will generally not change. In return, the interest rate at the time of borrowing is generally set higher than that of a variable rate.

Variable rates often have a lower initial applicable interest rate, but the borrower assumes the burden of future interest rate increases.

Fixed interest rates are sometimes described as ‘insurance against rising interest rates.’ However, unlike a true insurance product, this is a comparison where fixed rates end up being advantageous if interest rates rise, while variable rates might have been lower-cost if they do not.

Therefore, rather than asking ‘which is more profitable, fixed or variable,’ I think it is easier to understand by considering which interest rate risk is being borne by whom.

Furthermore, tolerance for that risk varies depending on the household. The significance of the same interest rate hike changes based on the loan amount, repayment period, remaining principal, available cash on hand, income stability, and plans for early repayment.

This way of thinking also connects to deposits and bonds.

The difference between fixed and variable is not just a matter of mortgages.

According to Bank of Japan statistics from September 2026, the average interest rate for ordinary deposits was 0.322%. Even if the policy interest rate is 1.25%, deposit interest rates do not rise at the same rate or speed. Since deposit interest rates are a funding cost for banks, competition for deposits and demand for funds also have an impact.

We will look at this difference in detail later in ‘Do banks really profit from rising interest rates?’

Bonds also have fixed-rate and floating-rate varieties. While the price of fixed-rate bonds tends to fall when market interest rates rise, floating-rate bonds generally have lower price sensitivity to interest rate changes because their coupons are periodically adjusted.

Whether it is mortgages or bonds, what they have in common is that by fixing the interest rate, who bears the burden of future interest rate fluctuations changes.

Five points for reading mortgage news

In the first installment, I wrote that it is important to look at ‘which interest rate has moved.’ For mortgages, checking the following five points will make the meaning of the news much easier to understand.

1. Whether it is variable, fixed for the entire period, or fixed-period selection

2. What interest rate is used as the benchmark

3. When the applicable interest rate is reviewed

4. When the repayment amount changes

5. How much principal remains at that point

A headline stating ‘mortgage rates have risen’ does not tell you who is affected or to what extent.

What is important is not just the level of the interest rate, but looking at to whom, through what channel, and when that interest rate will be reset.

Next time, we will shift our perspective from households to the foreign exchange market and consider ‘Why can the yen weaken even when the Bank of Japan raises interest rates?’

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Main reference materials

Bank of Japan, Ministry of Finance “Government Bond Interest Rate Information”, Japan Housing Finance Agency “Flat 35 Interest Rate Information” and “Mechanism of Flat 35 (Purchase Type)”, and mortgage product descriptions and FAQs from MUFG Bank, Sumitomo Mitsui Banking Corporation, and Mizuho Bank