Fixed interest rates for housing loans rose significantly in June. Flat 35 is at 3.21%, while variable rates remain around an average of 1%.
Even using the 1% "Child-rearing Plus" discount, the difference from variable rates amounts to approximately 17 million yen over 35 years. Is this difference worth continuing to pay as an "insurance premium" against rising interest rates?
June Housing Loan Interest Rates Are Out
The June rate for Flat 35 is 3.21% (35-year, lowest limit). The increase from the previous month was 0.5%, and 10-year fixed rates at major banks have also been raised across the board.
Mitsubishi UFJ is 3.27%, Mizuho 3.25%, and Sumitomo Mitsui 3.5% (all June rates).
With 11 consecutive months of increases, it's probably time to discard the feeling that "it will settle down eventually."
On the other hand, except for a few financial institutions, variable rates have not moved. The most favorable variable rates at each bank remain unchanged at an average of around 1%.
A 2.2% Difference Between Fixed and Variable
When you line up the monthly repayment amounts, the weight of this number becomes clear.
If you borrow 40 million yen, how much will the difference be? Let's compare the actual figures (40 million yen, 35 years, principal and interest equal repayment).
Flat 35 currently has a system called "Child-rearing Plus."
If you meet requirements such as the number of children and the energy-saving performance of the house, you can receive a mortgage rate discount of up to 1% for the first 5 years. (Depending on the points earned, discounts may continue from the 6th year onwards.)
If used to the maximum, the interest rate for the first 5 years drops from 3.21% to 2.21%.
*Variable rates change repayment amounts according to interest rate fluctuations.
Using the 1% Child-rearing Plus discount for the first 5 years saves about 2.32 million yen over 35 years compared to the standard rate. It's a system anyone eligible should definitely use.
However, the gap with variable rates remains large.
Even using Child-rearing Plus to the full, the difference in total payments over 35 years compared to variable rates is still about 16.87 million yen.
Choosing a fixed interest rate means "buying insurance against the risk of variable rates rising significantly in the future."
Even if you reduce the burden for the first 5 years with Child-rearing Plus, that insurance premium amounts to about 24,000 yen per month for the first 5 years, and about 43,000 yen per month from the 6th year onwards.
So, at what point can we say this insurance premium was "worth paying"?
At What Percentage Does Variable Become More Expensive Than Fixed?
Many people think, "Won't variable rates also rise from now on?" so I did the math.
But first, let's clarify one premise.
Since no one knows how variable rates will move in the future, I calculated based on the assumption that "it stays at 1% for 10 years, then jumps at a certain point and stays at that level for the remaining 25 years."
Under those conditions, the break-even point where the total payment of Flat 35 and the variable rate align is approximately 5.1%.
Only if the variable rate rises to the 5% range and stays there for 25 years does it become a case of "I should have gone with fixed."
For those who ask, "What if it rises more gradually but steadily?" I can say this:
Even if the variable rate eventually rises to the same 3.21% as the current Flat 35, the difference in interest accumulated during the low-interest period of the first 10 years is so large that the variable rate remains more advantageous.
This relates to the structure of principal and interest equal repayment that I mentioned in another X post.
The article is here ⤵️
https://x.com/myhomefp/status/2056479842170974260?s=20
Incidentally, at the moment, an additional rate hike from 0.75% to 1.0% is considered likely at the Bank of Japan's June policy meeting (6/16-17).
Even if realized, the reflection in variable rates is expected to be October at the earliest due to the timing of bank reviews.
Even then, the variable rate will be around 1.2%, leaving a gap of nearly 2% with the fixed rate. (Depending on long-term interest rate movements, Flat 35 rates may have risen even further by October.)
If You Choose Variable, You Must Know the Repayment Structure
While variable is advantageous in most cases right now, there are mechanisms you should know if you choose it: the "5-year rule" and the "125% rule."
Many variable-rate mortgages have a rule that "even if interest rates rise, the repayment amount does not change for 5 years."
Furthermore, when the repayment amount increases from the 6th year, the increase is capped at 125% of the previous amount.
At first glance, it seems like a borrower-friendly system.
However, when combined with the structure of principal and interest equal repayment, a phenomenon occurs that requires caution.
If you start with 40 million yen at a 1% variable rate, the monthly repayment is about 113,000 yen. In the first month, the breakdown is about 33,000 yen in interest and 80,000 yen in principal repayment.
Suppose the interest rate rises to 2% in the 4th year (the balance at this point is about 37.1 million yen).
Due to the 5-year rule, the repayment remains 113,000 yen. But interest increases to about 62,000 yen, so the principal repayment drops to about 51,000 yen—nearly 30,000 yen less than at the start.
If it rises to 3% in the 5th year (balance about 36.5 million yen), the repayment is still 113,000 yen. But interest becomes 91,000 yen. Principal repayment is only 22,000 yen, less than 1/4 of the original amount.
"I'm paying every month, but the principal is hardly decreasing."
This is the hidden cost of the 5-year rule. If several years pass with a high balance, there is a risk of becoming "over-loaned" (debt exceeding the sale price) when you want to sell.
What Should You Do When Choosing Variable?
The premise that variable is advantageous at current interest levels doesn't change. However, I want you to execute these three things as a set:
- Manage the difference from fixed as a "prepayment reserve." Compared to Child-rearing Plus, choosing variable leaves about 43,000 yen per month (520,000 yen per year) in your pocket from the 6th year. It's important to put this in a separate account for prepayments rather than using it for living expenses. If you reduce the principal in a lump sum when rates spike, you can mitigate the impact of the 5-year rule. If you can invest it, a 3% annual return is fine. 43,000 yen a month compounded for 10 years becomes about 5.9 million yen.
- Check monthly repayments at 2% or 3% now. You can simulate this for free on bank websites. It's important to see if you can afford the household budget if the rate doubles.
- Habitually compare the balance with the property value every 5 years. If the principal reduction slows down, it's easy to stay in an over-loan state. Be especially conscious of this within 10 years of purchase.
There Are People Who Should Choose Fixed
To avoid misunderstanding, fixed interest rates aren't wrong for everyone. It has value for those who:
- Don't want to worry about interest fluctuations for 35 years.
- Have periods of lower income due to childcare leave or reduced hours.
- Have fluctuating business income.
However, there is one thing to realize.
If your household has the strength to pay 155,900 yen a month (from the 6th year) for 35 years even with Child-rearing Plus, you should be able to withstand a certain amount of variable rate increases. Such households are exactly the ones who can choose variable and invest the 43,000 yen saved each month.
Using variable while maintaining the same monthly spending feel as fixed, while the difference steadily accumulates—that is the best way to utilize variable rates.
Before choosing, first ask yourself: "Can my household withstand it if the variable rate rises to the 3% range of Flat 35?"
