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30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing

30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.

vmarsy 10y ago
what rates of those fixed mortgages do these subsidies provide on average? To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough. Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.
- kasey_junk 10y ago
  Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15. In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.
nl 10y ago
Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan. My understanding is that is pretty similar to the US, but it sounds different to Canada. We don't have the same tax breaks as in the US though.
- refurb 10y ago
  In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years. It's really quite amazing if you think about it. I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free. If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.
  - marvin 10y ago
    If your 30-year mortgage is at 5% and you refinance it at 25 years at 3%, who pays the loss the bank takes due to the new, lower interest rate?
    - kasey_junk 10y ago
      The bank. If interest rates go up a few points in the coming years, and it would be hard for them not to, banks are going to be sitting on a ton of mortgages that are not profitable. That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.
      - marvin 10y ago
        Ok, so in effect it's these quasi governmental corporations that assume the risk of rates going up (which would make it very lucrative to refinance), and that's where the subsidy lies. We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.
        smsm42 10y ago
        The banks mitigate the loss from early payment by heavily front-loading the interest - i.e. first years huge part of what you're paying is interest, and very little goes to equity (at least in default fixed payment scheme, you can pre-pay the principal if you want, but on top of the default fixed payments). The longer is the life of the loan, the more goes to equity and the less to interest. So if you close off the mortgage early, you've already paid a lot of interest that bank would have gotten. Of course, not all of it, but the bank also gets the money back earlier, so I don't think they lose too much.
    - patrickg_zill 10y ago
refurb 10y ago
That's correct. The 30 year mortgage wouldn't exist if it's weren't for the gov't coming in and backing them. Before the Great Depression, mortgages were completely private – homeowners would generally string refinances one after another, and mortgage terms were less than 5 years. It wasn’t until 1934 that the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization plan, and terms of 15-20 years (much like today, many mortgages are insured based on standardized programs – say, 30 years, fixed interest, 80% loan to value). [1]https://dqydj.com/history-30-year-mortgage-private-mortgage-insurance/ https://dqydj.com/history-30-year-mortgage-private-mortgage-...
smsm42 10y ago
Understood, and makes sense. But even variable rate mortgages in US do not require maintaining equity threshold, do they? Maybe also consequence of govt guarantee. Though I wonder what Canadian central bank would do if it finds itself in the same situation of mass mortgage defaults/underwater mortgages as happened in US - I suspect they would also opt for one or another form of bailout, thus implementing implied, if not explicit, guarantee. Tax breaks of course is another thing that massively influences US mortgages. I probably would never take my current mortgage if not the interest tax break.

30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.

vmarsy 10y ago

what rates of those fixed mortgages do these subsidies provide on average? To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough. Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.

kasey_junk 10y ago
Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15. In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.

nl 10y ago

Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan. My understanding is that is pretty similar to the US, but it sounds different to Canada. We don't have the same tax breaks as in the US though.

refurb 10y ago
In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years. It's really quite amazing if you think about it. I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free. If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.
- marvin 10y ago
  If your 30-year mortgage is at 5% and you refinance it at 25 years at 3%, who pays the loss the bank takes due to the new, lower interest rate?
  - kasey_junk 10y ago
    The bank. If interest rates go up a few points in the coming years, and it would be hard for them not to, banks are going to be sitting on a ton of mortgages that are not profitable. That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.
    - marvin 10y ago
      Ok, so in effect it's these quasi governmental corporations that assume the risk of rates going up (which would make it very lucrative to refinance), and that's where the subsidy lies. We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.
      - smsm42 10y ago
        The banks mitigate the loss from early payment by heavily front-loading the interest - i.e. first years huge part of what you're paying is interest, and very little goes to equity (at least in default fixed payment scheme, you can pre-pay the principal if you want, but on top of the default fixed payments). The longer is the life of the loan, the more goes to equity and the less to interest. So if you close off the mortgage early, you've already paid a lot of interest that bank would have gotten. Of course, not all of it, but the bank also gets the money back earlier, so I don't think they lose too much.
  - patrickg_zill 10y ago

refurb 10y ago

That's correct. The 30 year mortgage wouldn't exist if it's weren't for the gov't coming in and backing them. Before the Great Depression, mortgages were completely private – homeowners would generally string refinances one after another, and mortgage terms were less than 5 years. It wasn’t until 1934 that the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization plan, and terms of 15-20 years (much like today, many mortgages are insured based on standardized programs – say, 30 years, fixed interest, 80% loan to value). [1]https://dqydj.com/history-30-year-mortgage-private-mortgage-insurance/ https://dqydj.com/history-30-year-mortgage-private-mortgage-...

smsm42 10y ago

Understood, and makes sense. But even variable rate mortgages in US do not require maintaining equity threshold, do they? Maybe also consequence of govt guarantee. Though I wonder what Canadian central bank would do if it finds itself in the same situation of mass mortgage defaults/underwater mortgages as happened in US - I suspect they would also opt for one or another form of bailout, thus implementing implied, if not explicit, guarantee. Tax breaks of course is another thing that massively influences US mortgages. I probably would never take my current mortgage if not the interest tax break.