Last Updated: February 2026
If you’re considering a variable rate mortgage in Japan, you need to understand the Japan 25-5 mortgage rule—or more accurately, the 5-Year Rule (5年ルール) and 125% Rule (125%ルール). These two rules work together to shield borrowers from sudden payment increases when interest rates rise, but they come with hidden risks that few English resources explain clearly.
Nearly 77% of Japanese mortgage borrowers choose variable rates, attracted by interest rates as low as 0.3-0.5%. After 17 years of near-zero rates, the Bank of Japan raised rates in July 2024 and January 2025, making these protective rules suddenly relevant for millions of homeowners—and essential knowledge for anyone considering a Japan mortgage today.
What is Japan’s 5-Year Rule (5年ルール)?
The 5-Year Rule (5年ルール, go-nen rūru) is a standard clause in most Japanese variable rate mortgages that keeps your monthly payment amount fixed for approximately five years, even when interest rates change.
Here’s how it works:
- Banks review your interest rate twice yearly (April 1 and October 1)
- New rates take effect in June/July and December/January respectively
- Despite rate changes, your monthly payment amount stays the same for five years
- After five years, payments are recalculated based on remaining principal and current rates
As Jeff Wynkoop, a licensed real estate broker (宅地建物取引士) explains: “The 5-year rule is the internal bank rule that for five years after interest rates change, the bank will maintain the same monthly payment amounts for borrowers.”
This sounds like excellent protection, but there’s an important catch: while your payment stays fixed, the allocation between principal and interest changes.
How Payment Allocation Shifts
When interest rates rise under the 5-Year Rule:
| Rate Environment | Payment Breakdown |
|---|---|
| Rates stable | ¥60,000 principal + ¥17,875 interest = ¥77,875 |
| Rates increase | ¥45,000 principal + ¥32,875 interest = ¥77,875 |
| Rates spike | ¥25,000 principal + ¥52,875 interest = ¥77,875 |
Your total payment remains ¥77,875, but you’re paying off your loan much more slowly. In extreme cases, your entire payment goes to interest—or worse, doesn’t even cover the interest owed.
Warning: The 5-Year Rule doesn’t reduce what you owe. It only delays when you pay it. If rates rise significantly, you may end up owing more at the end of five years than you did at the beginning, despite making every payment on time.
What is the 125% Rule (125%ルール)?
The 125% Rule (125%ルール, hyaku nijū-go pāsento rūru) caps how much your payment can increase when the 5-year period ends and your payment is recalculated.
The rule states: your new monthly payment cannot exceed 125% of your previous 5-year period payment.
Japan 25-5 Mortgage Rule Payment Cap Example
If your payment was ¥100,000 per month during the first 5-year period:
| Period | Maximum Payment | Percentage of Original |
|---|---|---|
| Years 1-5 | ¥100,000 | 100% |
| Years 6-10 | ¥125,000 | 125% |
| Years 11-15 | ¥156,250 | 156% |
| Years 16-20 | ¥195,313 | 195% |
| Years 21-25 | ¥244,141 | 244% |
Even if interest rates justify a payment of ¥200,000 in year 6, you’d only pay ¥125,000. The difference gets deferred—not forgiven.
How the 5-Year and 125% Rules Work Together
These two rules create a multi-layer protection system:
Layer 1: 5-Year Rule — Payments stay fixed regardless of rate changes within each 5-year period
Layer 2: 125% Rule — When payments are recalculated every 5 years, increases are capped at 25%
Together, they provide significant short-term stability. A borrower whose rate doubles might see no immediate impact on their monthly budget. However, this protection is purely a timing mechanism—it shifts costs to the future rather than eliminating them.
Process Timeline Under Both Rules
- Month 1-60: Payment fixed at original amount
- Twice yearly: Bank reviews and adjusts interest rate internally
- As rates rise: Interest portion grows, principal portion shrinks
- Year 5 recalculation: New payment calculated, capped at 125% of previous
- Month 61-120: New payment fixed (up to 125% of original)
- Process repeats: Every 5 years until loan ends
The Hidden Risk: Unpaid Interest (未払利息)
Here’s what most English-language mortgage guides don’t explain: if interest rates rise high enough, your capped payment may not cover even the interest portion of your loan. The shortfall is called unpaid interest (未払利息, miharai risoku).
How Unpaid Interest Accumulates
Consider a ¥30 million loan at an initial 0.5% rate:
| Scenario | Monthly Payment | Interest Due | Principal Paid | Unpaid Interest |
|---|---|---|---|---|
| Original 0.5% | ¥77,875 | ¥12,500 | ¥65,375 | ¥0 |
| Rate rises to 2.5% | ¥77,875 | ¥62,500 | ¥15,375 | ¥0 |
| Rate rises to 4% | ¥77,875 | ¥100,000 | ¥0 | ¥22,125/month |
In the extreme scenario, you’re paying ¥77,875 monthly, but ¥100,000 in interest accrues. The ¥22,125 difference becomes unpaid interest that accumulates with each payment.
Warning: Unpaid interest does not compound (interest on unpaid interest is not charged), but it also does not disappear. Japanese mortgage law requires that any remaining unpaid interest and principal must be repaid in a lump sum on your final loan payment date.
What Happens at Loan Maturity
When your loan ends—whether after 35 years or earlier—you must pay:
- All remaining principal
- All accumulated unpaid interest
- Any outstanding amounts
This creates a potential balloon payment that can catch borrowers off guard. If you’ve accumulated significant unpaid interest over decades of rate fluctuations, you could face a substantial lump sum at the end.
Real Payment Increase Examples Under the Japan 25-5 Mortgage Rule
Let’s look at concrete payment calculations for a ¥30 million loan over 35 years:
Monthly Payment at Different Interest Rates
| Interest Rate | Monthly Payment | Increase from 0.5% |
|---|---|---|
| 0.5% (2024 typical) | ¥77,875 | — |
| 1.0% | ¥83,709 | +7.5% |
| 1.5% | ¥89,804 | +15.3% |
| 2.0% | ¥96,162 | +23.5% |
| 2.5% | ¥102,780 | +32.0% |
| 3.0% | ¥109,654 | +40.8% |
Source: SBI Shinsei Bank simulation calculator
Total Interest Paid Over Loan Life
For a ¥50 million, 35-year loan:
| Rate Type | Rate | Monthly | Total Repaid | Total Interest |
|---|---|---|---|---|
| Variable | 0.7% | ¥133,000 | ¥55.8 million | ¥5.8 million |
| Fixed (Flat 35) | 1.89% | ¥156,000 | ¥65.6 million | ¥15.6 million |
The variable rate saves nearly ¥10 million in interest—if rates stay low. But rate increases erode that advantage quickly.
Banks That Don’t Follow These Rules
Not all Japanese banks apply the 5-Year Rule and 125% Rule. If your bank doesn’t follow these rules, your payments adjust immediately when rates change.
Banks Without 5-Year/125% Rules
- SBI Shinsei Bank — Payments adjust with each rate change
- Sony Bank — No payment caps; immediate adjustments
- Some regional banks — Varies by institution
Banks That Apply Both Rules
- Major city banks (Mizuho, MUFG, SMBC) — Standard 5-year/125% protection
- Tokyo Star Bank — Applies both rules
- Most regional banks — Generally apply both rules
Before signing any mortgage, ask specifically: “この変動金利ローンには5年ルールと125%ルールが適用されますか？” (Does this variable rate loan include the 5-Year Rule and 125% Rule?)
Equal Principal Repayment Method Exception
The rules described above apply to the equal principal and interest repayment method (元利均等返済, ganri kintō hensai)—by far the most common type.
If you choose the equal principal repayment method (元金均等返済, gankin kintō hensai), neither the 5-Year Rule nor 125% Rule applies. Your payments adjust immediately with rate changes.
Variable vs Fixed Rate Mortgages in Japan
Understanding the Japan 25-5 mortgage rule helps you decide between variable and fixed rates.
Current Interest Rates (February 2026)
| Type | Typical Rate Range | Notes |
|---|---|---|
| Variable | 0.3% - 0.8% | After 2024-2025 rate hikes |
| Fixed 10-year | 1.2% - 1.6% | Initial period only |
| Flat 35 (full term) | 1.47% - 1.86% | Government-backed fixed rate |
Variable Rate Advantages
- Significantly lower initial payments
- Flexibility to refinance if rates stay low
- 5-Year and 125% rules provide adjustment buffer
- Most popular choice (76.9% of borrowers in 2024)
Variable Rate Risks
- Payments can increase substantially over loan life
- Unpaid interest can accumulate silently
- Balloon payment risk at maturity
- Uncertainty about future costs
Fixed Rate Advantages
- Complete payment predictability
- No risk of unpaid interest
- Protection against rate spikes
- Better for long-term budgeting
Fixed Rate Disadvantages
- Higher initial payments
- Less benefit if rates stay low
- Prepayment penalties may apply
Impact of BOJ Interest Rate Hikes (2024-2025)
The Bank of Japan’s rate decisions directly affect variable mortgage rates. After maintaining rates near zero since 2007, the BOJ made historic moves:
Recent BOJ Rate Actions
| Date | Policy Rate | Impact |
|---|---|---|
| July 2024 | 0.25% | Highest since 1995 |
| January 2025 | 0.50% | Continued normalization |
Bank Response
Major banks raised the short-term prime rate from 1.475% to 1.625% in September 2024—the first increase since March 2007. Variable mortgage rates, which are typically set at prime rate minus a discount, increased accordingly.
For current borrowers under the 5-Year Rule, these increases are building up internally—they won’t feel the impact until their next 5-year recalculation date. New borrowers are seeing rates of 0.5-0.8% instead of the 0.27-0.35% common just two years ago.
Which Option is Better for Foreigners?
For foreign residents considering a Japan mortgage, the choice between variable and fixed depends on your situation.
Consider Variable If:
- You have substantial savings as a buffer (6-12 months of potential payment increases)
- You plan to sell or refinance within 5-10 years
- You’re comfortable monitoring rate trends
- You want the lowest possible initial payments
- Your bank applies the 5-Year and 125% rules
Consider Fixed If:
- Payment predictability is essential for your budget
- You plan to hold the property long-term (20+ years)
- You’re concerned about rate increases
- You qualify for the government-backed Flat 35 program
- You prefer to set it and forget it
Pro Tip: Many expats recommend maintaining cash reserves equivalent to 6-12 months of potential payment increases as a buffer against rate hikes. This gives you flexibility regardless of which rate type you choose.
For more on mortgage options for foreign residents, see our guide to getting a mortgage without permanent residency.
FAQ: Japan Variable Mortgage Rules
What happens to my mortgage payment when BOJ raises interest rates?
With the 5-Year Rule, your payment amount stays the same even when rates rise—but more of your payment goes to interest and less to principal. At your next 5-year recalculation, payments can increase up to 125% of the previous amount. Banks that don’t follow these rules (like SBI Shinsei Bank) adjust payments immediately with each rate change.
Can I lose my home due to unpaid interest accumulation?
Accumulating unpaid interest doesn’t directly trigger foreclosure, as you’re still making your contracted payments. However, at loan maturity, you must pay any remaining principal plus all accumulated unpaid interest in a lump sum. If you can’t make this payment, you would need to refinance, sell the property, or face potential default. The key is monitoring your loan balance throughout the term.
Should foreigners choose variable or fixed rate mortgages in Japan?
There’s no universal answer. Variable rates offer lower initial payments but carry uncertainty. Fixed rates provide predictability at higher cost. Consider your risk tolerance, how long you’ll hold the property, and your financial buffer. Many foreign residents without permanent residency have limited bank options regardless of preference—focus first on which banks will approve your application.
Which Japanese banks don’t follow the 5-Year and 125% rules?
SBI Shinsei Bank and Sony Bank are the most notable banks that don’t apply these rules—your payments adjust immediately when rates change. Most major city banks (Mizuho, MUFG, SMBC) and regional banks do apply both rules. Always confirm with your specific lender before signing, as policies can vary by loan product.
How much will my payment increase if interest rates rise to 2%?
On a ¥30 million, 35-year loan, payments would increase from approximately ¥77,875 at 0.5% to ¥96,162 at 2.0%—a 23.5% increase. Under the 125% Rule, this increase would be capped at ¥97,344 (125% of original), with the excess deferred as unpaid interest. Without these protective rules, you’d pay the full adjusted amount immediately.
Understanding Japanese Mortgage Terminology
When discussing mortgages with Japanese banks, knowing these terms helps:
| Japanese | Romaji | English |
|---|---|---|
| 5年ルール | Go-nen rūru | 5-Year Rule |
| 125%ルール | Hyaku nijū-go pāsento rūru | 125% Rule |
| 未払利息 | Miharai risoku | Unpaid interest |
| 変動金利 | Hendō kinri | Variable interest rate |
| 固定金利 | Kotei kinri | Fixed interest rate |
| 元利均等返済 | Ganri kintō hensai | Equal principal and interest payment |
| 元金均等返済 | Gankin kintō hensai | Equal principal payment |
| 短期プライムレート | Tanki puraimu rēto | Short-term prime rate |
Official Resources
For authoritative information on Japanese mortgages:
| Resource | Description |
|---|---|
| Japan Housing Finance Agency | Government agency administering Flat 35 |
| Bank of Japan | Central bank policy rate decisions |
| SBI Shinsei Bank Housing Column | Detailed Japanese explanation of rules |
Next Steps
Understanding the Japan 25-5 mortgage rule is essential for making an informed financing decision. Here’s how to proceed:
- Assess your risk tolerance — How would a 30-40% payment increase affect your budget?
- Check your bank’s policies — Confirm whether your lender applies both rules
- Calculate different scenarios — Use bank simulators to model rate increases
- Build a financial buffer — Save 6-12 months of potential payment increases
- Consider your timeline — Short-term owners may benefit from variable; long-term from fixed
For a complete overview of buying property as a foreign resident, see our complete guide to buying property in Japan. For financing specifics, explore our taxes and finance section.
The 5-Year Rule and 125% Rule provide valuable protection against payment shock, but they’re not magic—they defer costs rather than eliminate them. With proper understanding and planning, you can use variable rate mortgages effectively while avoiding the pitfalls that catch unprepared borrowers.