“I Can Only Buy a House with a Variable-Rate Mortgage…” The Tragedy of a 10 Million Yen Reduction in Loan Amount Due to Soaring Interest Rates! The Ultimate Defense Strategy to Prevent Household Financial Collapse

Even with an annual income of 7 million yen, borrowing limits have dropped by 10 million yen  

Mortgage rates are skyrocketing due to rising market interest rates and the Bank of Japan’s rate hikes. The rise in fixed-rate mortgages has been particularly pronounced, with the “Flat 35” rate surpassing the 3% mark in June ’26.

Under these circumstances, many people are likely concerned about the increase in their monthly payments. However, the problem doesn’t end there. Rising interest rates lead to a decrease in the “maximum loan amount” available—and, consequently, a reduction in the “price of the home one can afford.”

Until now, many people have been torn between choosing a “fixed-rate” or “variable-rate” mortgage. Going forward, however, the double whammy of “rising monthly payments” and “decreasing borrowing limits” caused by rising interest rates is expected to lead to an increase in the number of people who “can only buy a home with a variable-rate mortgage” and those who “cannot buy a home under current conditions.”

The maximum amount a borrower can borrow for a mortgage is set so that the ratio of annual repayment amounts to annual income—known as the debt-to-income ratio or repayment burden ratio—falls within the range specified by the financial institution. Annual repayment amounts include not only mortgage payments calculated using the “assessment interest rate” but also all other outstanding debts, such as other loans and credit card installment payments.

In the case of the “Flat 35” fixed-rate mortgage, the actual applied interest rate is used as the “assessment interest rate.” Since the assessment interest rate rises when the applied interest rate increases, the maximum loan amount approved for the same annual income will decrease.

*For mortgages from private financial institutions, each institution sets its own criteria for the “assessment interest rate,” and many set it at approximately 3% to 4% higher than the actual applied interest rate (though some institutions use a lower rate or the actual applied interest rate as the assessment interest rate).

The applicable interest rate for Flat 35 (loan term of 21 to 35 years, loan-to-value ratio exceeding 90%) rose from 1.950% in July ’25 to 3.250% in July ’26.As a result, the maximum loan amount for someone with an annual income of 7 million yen has decreased by more than 10 million yen over the past year (assuming no other outstanding loans and no down payment when using Flat 35, the maximum loan amount has decreased from approximately 62.11 million yen to approximately 51.17 million yen).

The reality of having only “variable-rate loans” to choose from  

Rising interest rates have reduced the amount that can be borrowed at fixed rates. At the same time, driven by anxiety over rising rates, there is growing demand to buy homes with fixed-rate mortgages that do not fluctuate. However, with interest rates already on the rise, attempting to secure a loan at a fixed rate—which is higher than variable rates—can easily result in monthly payments exceeding what borrowers can afford.

Even before that, because the maximum loan amount approved through credit screening has decreased, there are cases where people can no longer afford a home that they would have been able to purchase with a fixed-rate mortgage under previous conditions. When that happens, the remaining options are largely narrowed down to the following three:

• 1. Revise your plan to make a fixed-rate purchase feasible (e.g., lower the purchase price, reduce the loan amount, or extend the repayment term)
• 2. Give up on a fixed-rate mortgage and choose a variable-rate mortgage (accepting the risk of interest rate fluctuations)
• 3. Postpone the home purchase and reconsider once your household finances and assets are in better shape

Ideally, the choice between a “variable-rate mortgage” and a “fixed-rate mortgage” should be based on one’s risk tolerance and household financial flexibility. However, the current environment makes it all too easy for people to feel forced to choose a “variable-rate mortgage” simply because they “can’t pass the credit check for a fixed-rate mortgage” or “the monthly payments under a fixed-rate mortgage exceed what they can afford.”

To avoid any misunderstanding, a “variable-rate mortgage” is not inherently bad. While there is the risk of higher repayment amounts due to rising interest rates, it also has the advantage of offering a lower initial interest rate than a fixed-rate mortgage, making it easier to keep monthly payments manageable.

The problem lies in the fact that even “people who should not choose a variable-rate mortgage” and “people who should not buy a home under current conditions” are ending up purchasing homes with variable-rate mortgages. For those who feel strong anxiety about fluctuations in interest rates or repayment amounts, or for those whose household budgets would become strained if their repayments increased any further, buying a home with a variable-rate mortgage could mean taking on excessive risk.

With housing prices rising and interest rates climbing, many people feel a sense of urgency, worrying, “If I don’t buy now, I might never be able to afford a home.”Given that housing prices are expected to remain high and interest rates may rise further, that sense of urgency isn’t entirely unfounded. If you have financial leeway and qualify for a mortgage, it may be a good time to go ahead with the purchase. However, people whose household budgets are already stretched thin should not rush into buying out of panic.

Osamu Nagano (Nagano FP Office), a financial planner specializing in mortgages, says, “It’s important to distinguish between those who should buy and those who should get their finances in order first.”

Those who still have concerns about qualifying for a loan or making repayments should not rush; the priority is to get their finances in order—including their household budget, other debts, credit history, and debt-to-income ratio.

A Must! An Inflation-Adjusted Life Plan

Mr. Nagano points out, “When buying a home today, a traditional life plan alone is insufficient. You should consider an inflation-adjusted life plan.”

The key points to consider in an inflation-adjusted life plan are as follows.

◇ Repayment amount if borrowing at a fixed interest rate  

First, calculate your payments using a fixed-rate loan such as Flat 35 to confirm whether your desired loan amount is realistic. If a fixed-rate plan is manageable, it’s easier to make projections. On the other hand, if a fixed-rate plan is too tight and you can only afford the loan with a variable-rate plan, you’ll need to assess how much interest rate risk you’re willing to take on.

◇ Repayment Amounts if Interest Rates Rise After Borrowing at a Variable Rate

If you choose a variable-rate loan, you should not only consider the initial repayment amount but also verify how your monthly payments will change if interest rates rise, and whether your household budget can withstand the increase. If your budget cannot handle it, you’ll need to reconsider your plan or decide to hold off.Even in cases where the “5-Year Rule” or the “125% Rule” limits the increase in repayment amounts, you must understand that rising interest rates will increase your interest burden and slow the pace of principal repayment.  

• *5-Year Rule: A rule for variable-rate mortgages whereby the monthly repayment amount is reviewed every five years. Even if the applicable interest rate changes, the monthly repayment amount remains fixed until the review date, and the ratio of interest to principal within the repayment amount changes (the interest portion increases when interest rates rise).
• *125% Rule… A rule stipulating that the monthly payment after a review may not exceed 1.25 times (125%) the payment amount prior to the review.  

◇ Costs Associated with Home Ownership and Other Necessary Expenses

The amount you can borrow and the amount you can comfortably repay are different. In addition to a mortgage, owning a home entails expenses such as property taxes, fire insurance premiums, and repair costs. Furthermore, there are other necessary expenses beyond the home, such as education funds, retirement savings, and costs for caring for elderly parents. It is important to take all of these into account to ensure your household budget remains sustainable.

◇ Can you continue building assets (savings and investments) while repaying your mortgage?

Preparing for expenses such as education and retirement must proceed in parallel with mortgage repayments. If you treat asset building (savings and investments) as something to do only if you have extra money and keep putting it off, it may be too late. It is also necessary to confirm whether you have “room for asset building” at the time of purchasing a home.

◇Can you continue making payments even if your income decreases?

Since mortgage repayments extend over a long period, there is a possibility that your income could decrease during the repayment term due to illness, injury, unemployment, or a leave of absence. To prepare for such situations, you should set aside an emergency fund—in the form of savings or deposits—that can be accessed immediately, covering approximately six months to one year’s worth of monthly expenses, including your mortgage payments.You should also confirm your coverage against a reduction in income, including public benefits such as sickness allowance and unemployment insurance (unemployment benefits), as well as private disability income insurance and health insurance.Note that group credit life insurance generally provides coverage only in the event of death or severe disability and does not typically cover income reductions due to unemployment or leave of absence; however, there are types of group credit life insurance (such as cancer-specific group credit life insurance) that provide coverage for specific illnesses like cancer or certain disabilities.

◇ Outstanding Mortgage Balance at Retirement

Mortgage repayment periods (loan terms) are trending toward longer durations, and in many cases, the expected age of full repayment falls after retirement. If you still have a mortgage balance after retirement, you’ll need to calculate the outstanding balance at the time of retirement and run repayment simulations for the subsequent period.

Mortgage approval standards become stricter as the maximum loan amount decreases. Therefore, if you wait to consider a mortgage until after you’ve decided on a home, you may find that even though you’ve chosen a property, you fail to pass the credit check—leaving your plans as nothing more than a pipe dream. To prevent this, you should assess your “mortgage approval prospects” and “life plan” in parallel while “evaluating properties.”

In addition, other outstanding debts will have a greater impact on the approval process than ever before. You should settle any debts that could affect your application—such as auto loans, personal loans, revolving credit, and installment plans for smartphones—as much as possible before applying for a mortgage.

When buying a home today, it’s becoming increasingly important to base your decision not on whether to choose a “fixed or variable rate” or “how much you can borrow ,” but rather on whether purchasing this home will jeopardize your household finances or life plan in the long run.

If you can comfortably afford a home with a fixed-rate mortgage, it’s easy to plan your future repayments. In cases where a fixed-rate mortgage is out of reach but a variable-rate mortgage is feasible, you need to proceed only after confirming that your household budget can withstand future interest rate hikes. If both options are out of reach, your first priority should be to get your finances in order—including your income and expenses and other outstanding debts—to reduce sources of concern.Don’t rush—start by assessing your current situation, developing a plan for the future, and then working to improve your financial conditions.