What are the types of mortgage interest rates in Japan? (e.g., variable vs. fixed rates) and how should I choose?

Hello! Congratulations on preparing to buy a home in Japan—it's a major life milestone. Mortgage interest rates are indeed a headache for many people, and choosing the wrong one could mean paying significantly more over decades. Don't worry, I'll break it down for you in simple terms.

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The Three Main Types of Mortgage Rates in Japan

In Japan, banks primarily offer three types of mortgage rates. Think of them as three people with different personalities:

1. Variable Rate (変動金利) - The flexible but adventurous young person
2. Full-Term Fixed Rate (全期間固定金利) - The steady, reliable, but slightly rigid middle-aged person
3. Fixed-Rate Period Selectable Type (固定金利期間選択型) - The "hybrid" combining traits of both

Let's look at each one.

1. Variable Rate (変動金利)

This is currently the most mainstream and popular choice in the Japanese market, selected by over 70% of borrowers.

• What it is: As the name suggests, your interest rate isn't fixed. It fluctuates up and down based on the Bank of Japan's policy rate (think of it as the market's "benchmark price"). Banks typically reassess the rate every six months.
• Pros: Super low starting rate! Currently (2023-2024), many banks offer variable rates between 0.3% ~ 0.5%, which is incredibly low. This means your initial monthly payments are very manageable.
• Cons: Future uncertainty. If Japan's economy improves and the central bank raises rates, your mortgage rate will also increase, leading to higher monthly payments. This is the inherent risk.
• Who it's for:
  • People who can tolerate some risk and are financially/mentally prepared for potential rate hikes.
  • Those borrowing a relatively small amount or planning to repay early (so future rate hikes have less impact as the principal decreases).
  • Those who believe Japan's low-interest-rate environment won't change drastically in the short term.

Tip: While the rate changes, banks usually offer protective "shields": the 5-Year Rule and the 125% Rule.

• 5-Year Rule: Even if market rates change daily, your monthly payment amount stays fixed for 5 years.
• 125% Rule: When payments are adjusted after 5 years, the new amount cannot exceed 125% of the old payment. These rules prevent sudden payment spikes. However, be aware: if rates rise sharply, more of your payment might go towards interest, slowing down principal repayment. This is the risk of "unpaid interest" (未払い利息).

2. Full-Term Fixed Rate (全期間固定金利)

The most representative example is 「Flat 35」 (フラット35), offered through a collaboration between the Japanese government and banks.

• What it is: Your interest rate is completely locked in from the first day of your loan until the last (e.g., 35 years). It won't change by a single yen.
• Pros: Absolute peace of mind! No matter how the market changes, your monthly payment stays the same. This makes financial planning clear, stable, and lets you sleep soundly at night.
• Cons: The starting rate is significantly higher than the variable rate. Currently around 1.5% ~ 2.0%. Essentially, you're paying a higher interest rate for decades-long "interest rate insurance."
• Who it's for:
  • Risk-averse individuals who dislike uncertainty and prioritize stability and security.
  • Families with tight budgets who cannot afford potential payment increases.
  • Those who believe Japanese interest rates are likely to rise in the future.

3. Fixed-Rate Period Selectable Type (固定金利期間選択型)

This is a "middle-ground" option where you choose a fixed period.

• What it is: You select an initial "preferential period" with a fixed rate, such as 3, 5, or 10 years. Your rate is fixed during this period. When it ends, you have two choices:
  1. Switch to the prevailing variable rate.
  2. Select a new fixed rate (based on rates at that time).
• Pros: Rates are lower than full-term fixed but more stable than variable. Gives you several years of an "observation period" and "stability period."
• Cons: After the "stability period," you still face interest rate risk. If market rates surge when your period ends, you could face an awkward situation.
• Who it's for:
  • People with clear short-term plans. For example, planning to sell the house within 10 years or expecting a significant income increase in 10 years.
  • "Middle-grounders" who want to enjoy low rates for a few years without taking on too much risk.

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Choosing at a Glance

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So, Which One Should I Choose? (Pro Tips)

Theory isn't enough; you need to consider your own situation. Ask yourself:

1. What's your personality like?

   • Do news headlines like "Central Bank May Hike Rates" keep you up at night? If yes, definitely choose a fixed rate. Buying peace of mind is worth it.
   • Do you think "we'll cross that bridge when we come to it" and can handle potential increases? Then the variable rate's low starting point will suit you well.

2. How deep are your pockets?

   • Is your monthly repayment budget stretched to the limit? Would an extra ¥10,000 per month cause significant stress? Then choose a fixed rate.
   • Do you have ample savings left after mortgage payments or a healthy emergency fund? Then the variable rate's risk is manageable. You can invest or save the money saved from lower initial interest to prepare for future changes.

3. What are your future plans?

   • Is this your "forever home"? Then long-term stability might be more important, making a fixed rate more suitable.
   • Are you planning to live there for only about 10 years (e.g., until kids grow up or job changes)? Then a 10-year fixed or variable rate might be more cost-effective, as you won't need to worry as much about rate risks beyond 10 years.

The Golden Rule:

Don't just look at the current rate number! Many see variable at 0.3% and fixed at 1.8% and impulsively choose variable. Always use the bank's simulator to calculate what your payments would be if rates rose to 1.5% or 2.5%. Could you still comfortably afford it?

When consulting banks, boldly ask staff to run stress tests (ストレステスト) for different rate types. See what happens in the worst-case scenario. A good bank advisor will clearly explain the pros and cons, not just push the option with the lowest starting rate.

Hope this helps! Buying a home is a big deal—spending time researching rates is absolutely worth it. Best wishes for finding your perfect home!