Variable rate mortgages and the “5 year” and “125%” rule in Japan

Picture for visualization

A few of my Japanese friends seem to be misunderstanding the 5 year rule and the 125% rule that a lot of Japanese banks have on their mortgages.

I found an image that helps visualize it:

1. The bars represent your monthly payment amounts.
2. The gray part is principal, the blue part is interest, the black part is unpaid interest (the required monthly interest payment exceeds your monthly payment fixed by the 5 year rule).

So the 5 year rule says "We won't change your monthly payments for 5 years"

The 125% rule says "If we DO change it, we won't raise it above 125% the previous payment amount."

However, importantly, this does not actually prevent you from paying more interest. The portion of your payment going to interest will change and fluctuate with interest rates.

The "unpaid interest" builds up and must be paid at the end of the loan.

You can call your bank and ask if you have any "unpaid interest" accrued.