Mortgage rate types broadly fall into four categories: the variable rate type, the full-term fixed rate type, the fixed-rate-period type that locks in a rate for a set number of years, and the mixed type that combines variable and fixed. In short, if you prioritize a lower rate, variable is the basic choice; if you prioritize stable payments, fixed is the basic choice — but in practice, it's important to choose based on how stable your income is and how much risk you can tolerate.
- Variable rates typically start lower than fixed rates, but come with the risk that your payment amount could change as market interest rates move.
- A full-term fixed rate keeps your payment unchanged until the loan is paid off, making it easier to build a long-term financial plan.
- The fixed-rate-period type typically locks in a rate for the first few to a dozen-plus years, after which you choose between switching to variable or fixing again.
- The mixed type splits your loan between variable and fixed portions as a way to spread out the risk.
- Whichever rate type you choose, it's important to keep your repayment ratio (hensai hiritsu) — your annual loan payments as a share of your annual income — at a manageable level.
How Variable Rates Work, and Their Risks
A variable rate is periodically reviewed in line with market interest rates, and is typically set lower than a fixed rate at the outset. Many lenders review the payment amount every five years and cap how sharply it can rise, but in a rising-rate environment, your total repayment amount could still increase. It's important to think not just about the lower initial payment, but also about the increased burden if rates rise. While payments are designed not to jump suddenly, some lenders use a mechanism where unpaid interest (mibarai risoku) can accrue, so checking the contract terms carefully is essential.
Features of a Full-Term Fixed Rate
A full-term fixed rate is a type where the rate set at the time of borrowing stays the same until the loan is fully repaid. Because your payment stays constant no matter how market rates move, it's easier to build a long-term life plan. On the other hand, the rate at the time of borrowing is typically set higher than a variable rate, and if rates stay low over time, your total repayment could end up higher than with a variable rate.
How the Fixed-Rate-Period Type Works
The fixed-rate-period type locks in a rate for an initial set period — three, five, or ten years, for example — after which you choose again between variable and fixed. Note that your payment afterward will depend on rate levels at the time the fixed period ends. Some people choose this type to match a period when they want payments locked in, such as while children's education costs are high.
The Idea Behind Structuring a Mixed-Type Loan
The mixed type splits your loan amount between a variable portion and a fixed portion. For example, borrowing half as variable and half as fixed limits your risk if rates rise, while still letting you benefit from the variable portion if rates stay low. Whether lenders offer this option, and how much freedom you have in setting the ratio, varies by lender, so checking in advance is necessary.
Criteria for Choosing a Rate Type
The basic approach to choosing a rate type is to weigh the stability of your income, how much of an increase in payments you can tolerate if rates rise, and how it fits with your financial plans outside the mortgage. Fixed rates tend to be chosen by those who want to avoid changes in their payment amount, and variable rates by those who want to keep the initial payment burden low. Either way, keeping your repayment ratio at a manageable level is the underlying premise. It's important to build a repayment plan with some margin, taking into account possible future changes in income and other planned loans, such as education loans.
Can You Change Your Rate Type Later?
Many lenders let you change your rate type when a fixed-rate period ends, or when you refinance (kari-kae). Refinancing does come with separate costs, such as administrative fees and registration costs, so it's necessary to compare not just the difference in rates but the total costs involved.
Frequently Asked Questions
Which is better value — variable or fixed?
Future interest rate movements can't be predicted, so it's hard to say categorically which is better value. Those who prioritize stable payments tend to choose fixed rates, while those who prioritize a lighter initial payment burden tend to choose variable rates.
Is the mixed type available at every lender?
Whether a lender offers this option, and how much freedom you have in setting the variable-to-fixed ratio, differs by lender. If you're considering this option, we recommend checking with the lender in advance.
Can I change my rate type partway through the loan?
You may be able to change it when a fixed-rate period ends or when you refinance. Refinancing does involve administrative fees and registration costs, so it's important to compare the total costs involved as well.
Summary
Mortgage rate types include variable, full-term fixed, fixed-rate-period, and mixed — each with a different rate level and approach to risk. It's important to choose a rate type that matches your own income situation and life plan, based on how much variation in your future payment you can tolerate.