“The Reiwa Mortgage Nightmare” Brought on by the BOJ’s Rate Hike… The Shock of a 40,000-Yen Increase in Monthly Payments by 2027 and 4 Urgent Measures to Take

As the Bank of Japan’s interest rate hikes gain momentum, borrowers who took out loans of tens of millions of yen at ultra-low interest rates are facing the “Reiwa Mortgage Hell,” where their monthly payments are set to skyrocket by tens of thousands of yen as interest rates double.How high will interest rates rise from here? If that happens, “when” should you act, and “what measures” should you take? We examine possible strategies, such as refinancing and making early repayments.  

The Trap of the “Time Lag” in Variable-Rate Loans

The Bank of Japan is accelerating its interest rate hikes. In less than a year, it has raised the policy rate three times by 0.25% each—a total increase of 0.75%—and another hike is expected before the end of the year. In light of these developments, the number of consultations regarding mortgages has surged, but one thing is surprising.Quite a few people are unaware of the extent to which these rate hikes have been reflected in their own mortgage rates.

With variable-rate loans, the interest rate fluctuates in response to trends in the short-term money market, but the timing of rate adjustments varies by bank.

Many banks review the benchmark interest rate—which serves as the basis for the borrowing rate—twice a year, in April and October, while others do so monthly or in May and November.Furthermore, the timing for applying the revised benchmark rate to the actual loan interest rate also varies by bank; many banks apply the change starting with the payment due three months after the reference date.

The Mechanism Behind the Delay in Reflecting Rate Hikes

Furthermore, even if an interest rate hike occurs before the review month, it is not guaranteed that it will be reflected.Even if October 1 is the reference date, many banks only reflect the rate hike from June in their October adjustments and do not factor in the September hike. Consequently, even if there are no additional rate hikes by April ’27, the benchmark interest rate for April ’27 will still be raised.

Because the Bank of Japan has been raising rates in rapid succession, it has become difficult to keep track of exactly what your loan interest rate is. However, it is important to first check the rules governing loan interest rate adjustments to understand the extent to which the Bank of Japan’s rate hikes are being reflected.

Will the “2% interest rate” be reached in June ’27?

Next, let’s consider how long the Bank of Japan’s rate hikes will continue. Looking at the current state of the short-term money market, the policy rate is projected to be 1.5% in December ’26, 1.75% in March ’27, and 2.0% in June ’27.In other words, for the time being, rate hikes of 0.25% are expected approximately every three months, coinciding with the Monetary Policy Meetings.

Furthermore, once the rate reaches 2%, the assumption is that there will be one more rate hike sometime in 2027. This outlook is based on the price of the “TONA 3-Month Interest Rate Futures” listed on the Japan Exchange Group (Osaka Securities Exchange) and is calculated using actual trading data from institutional investors who trade based on their forecasts of future interest rates.

An Additional 40,000 Yen in Repayments? The Impact of a 2% Interest Rate

Given the forecasts for the short-term money market, it is necessary to consider a repayment plan based on a policy interest rate of 2%.

First, let’s look at the impact on existing loans. Note that variable interest rates are generally linked to the short-term prime rate set by banks. Since most banks tie their short-term prime rates to the policy interest rate, the following calculations are based on that assumption.

For example, let’s consider a scenario where, in October 2022—during the era of negative interest rates—a borrower took out a 35-year loan of 50 million yen at an interest rate of 0.5%, and under the “5-Year Rule,” began repaying at 2.5% starting in October 2027.The “5-Year Rule” means that even if the interest rate on the loan rises, the monthly repayment amount remains unchanged for five years. To simplify the calculation, we’ll assume the interest rate remains at 0.5% for the first five years and will not factor in any interest rate hikes during that period.

• [As of October ’22]
• Interest rate: 0.5% / Loan amount: 50 million yen / Loan term: 35 years
• ・Monthly payment: 130,000 yen (rounded to the nearest 100 yen; same applies below)
• (Breakdown of the first payment: Principal 109,000 yen, Interest 21,000 yen)
• ・Total repayment amount: 54,513,000 yen (Principal: 50,000,000 yen; Interest: 4,513,000 yen)　

——————–

• [As of October ’27]
• Interest rate: 2.5% / Loan amount: 43.38 million yen / Loan term: 30 years
• ・Monthly payment: 171,000 yen
• (Breakdown of the 61st payment: Principal 81,000 yen, Interest 90,000 yen)
• ・Total Repayment: 61,705,000 yen (Principal: 43,380,000 yen, Interest: 18,325,000 yen)　  

Is the “125% Rule”—a true nightmare—about to kick in?

You might be surprised to find that the impact of rising interest rates is greater than you imagined . Even though you’ve repaid a total of 7.8 million yen over five years, the total repayment amount for the remaining 30 years has increased by more than 7 million yen compared to when you took out the loan. Your monthly payment will increase by about 41,000 yen, with more than half of that going toward interest.

Note that if the bank adopts the “125% Rule,” the increase under the five-year rule will be adjusted so that it does not exceed 1.25 times (i.e., 125%) the previous monthly repayment amount.In the case of the 130,000 yen per month mentioned in the previous calculation, the upper limit would be 162,500 yen. However, any amount exceeding 125% would accumulate as unpaid interest.

While nearly all banks that apply the “5-Year Rule” also adopt this “125% Rule,” there have been no known instances of its application in Japan—at least not since the bursting of the bubble economy.Even if the Bank of Japan were to abandon its ultra-low interest rate policy and transition to a “world with interest rates,” this has long been considered “unthinkable.” Yet by 2027, this scenario is beginning to look increasingly realistic. This is because such rapid and substantial interest rate hikes are anticipated within a very short timeframe.

Please note that this is merely a projection based on current forecasts for the short-term money market. It could change significantly depending on future economic and financial conditions (as I’ll discuss later, I’m skeptical about a 2% policy rate). The key is to develop a financial plan while taking these possibilities into account.

“Four Strategies” for Variable-Rate Borrowers

Let’s take a moment to summarize. Here are the four steps that people currently holding variable-rate loans should take:

• ① Re-evaluate Your Loan
• → Determine when to review your interest rate and whether the “5-Year Rule” or “125% Rule” applies　
• ② Assess the impact of interest rate hikes on your loan rate
• 　→ To what extent have past interest rate hikes been reflected in your loan rate? How much of the unreflected rate hike is how much
• ③ Estimating Loan Payments if Interest Rates Continue to Rise
• 　→ How will loan payments change if the policy interest rate rises to “1.5%,” “1.75%,” or “2%”?
• ④ Creating a Financial Plan Based on Loan Projections
• 　→ Reviewing living expenses and investment strategies, etc.

Since October is when many banks review their interest rates, many of you have likely already received notifications. Be sure to review them carefully.

“From Variable to Variable”: Refinancing Strategies

Is refinancing a viable option in the current financial environment? Since long-term interest rates have already risen significantly, refinancing into a fixed-rate loan with a longer term presents a considerable hurdle.The minimum interest rate for “Flat 35” loans effective in October is 3.83% per annum, the highest level since the program was revised in October 2017. Few people are likely to find this interest rate acceptable.

However, refinancing to a lower variable-rate loan is worth considering. While it depends on the outstanding balance and loan term, there are cases where refinancing can be beneficial if there is an interest rate difference of 0.2–0.3%.For example, in the case of the loan mentioned earlier—with an interest rate of 2.5%, a loan amount of 43.38 million yen, and a 30-year term—if you could refinance to a variable rate of 2.2%, you could reduce your total repayment amount by more than 1 million yen, even after paying approximately 1 million yen in administrative fees, registration taxes, and other costs.This is a viable option for those with relatively high variable-rate loans.

Prioritize “Early Repayment” Over NISA

Additionally, people who are investing while carrying a mortgage would be wise to exercise greater caution going forward.Until now, thanks to the mortgage interest deduction, even those with variable-rate loans often received tax refunds that exceeded their interest payments, and many people invested through programs like NISA. However, with borrowing rates now exceeding 1%, investing in risky financial products without principal protection should be reconsidered.

Of course, this isn’t a problem for those with sufficient financial leeway—such as those whose savings exceed their outstanding mortgage balance. However, people who have almost no money left to set aside for savings after making monthly mortgage payments and regular investment contributions should prioritize saving over investing. For the average individual, investing while carrying a mortgage is highly likely to involve “excessive risk.”

Specifically, a viable plan might involve investing in retail government bonds and considering making early repayments once the mortgage interest deduction period ends.

Is a 2% Interest Rate the Final Blow to the Japanese Economy?

To reiterate, the “2.0% policy interest rate in June 2027” discussed here is a forecast based on current trading conditions in the short-term money market. Transactions are actually being conducted based on this forecast, and there are market participants who will suffer losses if the forecast proves incorrect. In that sense, it differs from mere predictions by economists and analysts.I have been closely monitoring the short-term money market, and while there have been instances of a roughly three-month lag since the Bank of Japan began raising rates, the outlook has generally proven accurate. This cannot be taken lightly.

However, personally, I feel that the current outlook is exaggerated. The reason is that leading economic indicators—such as corporate capital expenditure plans and the number of new job openings—are already showing signs of weakness.At the press conference following the September rate hike, the Bank of Japan governor stated, “The policy phase has shifted to stabilize inflation at around the 2% target,” signaling a positive stance toward future rate hikes. However, there is a growing risk that further rate hikes could overkill the economy. If the burden of mortgage payments increases, an impact on personal consumption will be inevitable.I believe there is a very real possibility that the policy rate will be capped at 1.5% for the time being.