4 ms·

Fixed rate mortgages are a uniquely US thing I think - I imagine made possible by government entities securing them. Rest of the world is predominantly on varia

by nvarsj 7y ago

Fixed rate mortgages are a uniquely US thing I think - I imagine made possible by government entities securing them. Rest of the world is predominantly on variable rate mortgages - why would a rational lending entity take on the risk of a fixed rate?

danmaz74 7y ago
In Italy almost all mortgages used to be on fixed rates until 2000
tomp 7y ago
AFAIK it's actually the other way around. Banks, hedge funds and other institutions regularly trade "swaps" - instruments that swap variable interest rate for some fixed interest rate - the variable rate is usually "FED rate" or some well-known benchmark, whereas the fixed rate is set to be such that the net present value is zero - so that you can establish such contract without any immediate exchange of money. If anything, it's a huge anomaly that this facility isn't routinely available to retail customers, and an indication of lack of competition within the banking sector in many countries.
- nvarsj 7y ago
  The mortgage market is giant. I don't think there is enough liquidity to remove all the risk off of bank's books from private investors. This is where the government comes in I believe. Freddie Mac/Fannie Mae buy all the loans off of the banks. Many of these are later sold to investors who want to bet on rates - but I imagine Freddie/Fannie still has huge exposure to interest rate moves.
pintxo 7y ago
Fixed rates are the default in Germany. You would have a hard time trying to find a bank offering a variable rate to a normal customer. They have them, but they are surely not standard and fortunately not offered aggressively. I am unaware of any such regulation, but there probably is one.
- noir_lord 7y ago
  In the UK it's mostly fixed for X years (usually a low number 2-5) then variable rate for the remainder. You can go longer but the bank will factor that with a higher fixed rate to offset variation.
  - SilasX 7y ago
    In US lingo, that would be referred to as an adjustable rate, like "5/1 ARM" (fixed for five years, then adjusts each [one] year). When they say "fixed" in the US, they mean fixed for the full term. I'm honestly surprised that became the standard, it seems like a lot of risks for the banks for what they're getting. I think it has something to do with Fannie Mae and Freddie Mac preferring to buy some mortgages and absorb the risk? https://www.bankrate.com/glossary/0-9/7-1-arm/ https://www.bankrate.com/glossary/0-9/7-1-arm/
  - pintxo 7y ago
    Germany has 5, 10, 15 and 20 year mortgages as the „default“. With the longer ones having a legal exit option (only for the Customer) at the 10 year mark. So in case the interest goes down, you can always refinance after 10 years. Independent of your Bank agreeing to it.
noelsusman 7y ago
US inflation has been stable for almost 40 years.
- craftyguy 7y ago
  I guess it depends on what you mean by 'stable'. Just eye-balling the data here shows there are historical swings of around ~4-5% on a per-year basis: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ https://www.usinflationcalculator.com/inflation/historical-i... And of course the 2008 'financial crisis' didn't really result in 'stable inflation' in the US within the last 40 years.
lumost 7y ago
Having personally just purchased a home in the US I can say that a 400 bps increase in a variable interest rate would effectively double my housing cost, and place my home underwater as the Total Cost of Ownership would more than double over 30 years. If the interest rates increased by 600 bps to the maximum of the last 30 years I'd unavoidably default and declare bankruptcy. On a per consumer level a variable rate is much higher risk, even in countries with highly variable inflation rates some fixed form of incomes will not inflate uniformly with the economy and a variable rate would increase the rate of defaults. On the other hand the loan terms and risks are determined once at loan origination where it's quite feasible for a financial institution to hedge out any long term inflationary risk.
- xfitm3 7y ago
  What is bps in this context?
  - SilasX 7y ago
    Basis points, which are a hundredth of a percent on an interest rate, eg “6% is 200 bps more than 4%.”
- nvarsj 7y ago
  Oh yes, it's a big risk. I think this is at least one reason why policy makers are so hesitant to raise rates. Especially in places like the UK, where many home owners are highly leveraged assuming a low interest rate, yet only have 3-5 year fixed rates. I wouldn't be surprised if there were a large increase in defaults if the interest rates went up here. It would probably bring home prices down to more reasonable levels as well.

by nvarsj 7y ago

danmaz74 7y ago

In Italy almost all mortgages used to be on fixed rates until 2000

tomp 7y ago

AFAIK it's actually the other way around. Banks, hedge funds and other institutions regularly trade "swaps" - instruments that swap variable interest rate for some fixed interest rate - the variable rate is usually "FED rate" or some well-known benchmark, whereas the fixed rate is set to be such that the net present value is zero - so that you can establish such contract without any immediate exchange of money. If anything, it's a huge anomaly that this facility isn't routinely available to retail customers, and an indication of lack of competition within the banking sector in many countries.

nvarsj 7y ago
The mortgage market is giant. I don't think there is enough liquidity to remove all the risk off of bank's books from private investors. This is where the government comes in I believe. Freddie Mac/Fannie Mae buy all the loans off of the banks. Many of these are later sold to investors who want to bet on rates - but I imagine Freddie/Fannie still has huge exposure to interest rate moves.

pintxo 7y ago

Fixed rates are the default in Germany. You would have a hard time trying to find a bank offering a variable rate to a normal customer. They have them, but they are surely not standard and fortunately not offered aggressively. I am unaware of any such regulation, but there probably is one.

noir_lord 7y ago
In the UK it's mostly fixed for X years (usually a low number 2-5) then variable rate for the remainder. You can go longer but the bank will factor that with a higher fixed rate to offset variation.
- SilasX 7y ago
  In US lingo, that would be referred to as an adjustable rate, like "5/1 ARM" (fixed for five years, then adjusts each [one] year). When they say "fixed" in the US, they mean fixed for the full term. I'm honestly surprised that became the standard, it seems like a lot of risks for the banks for what they're getting. I think it has something to do with Fannie Mae and Freddie Mac preferring to buy some mortgages and absorb the risk? https://www.bankrate.com/glossary/0-9/7-1-arm/ https://www.bankrate.com/glossary/0-9/7-1-arm/
- pintxo 7y ago
  Germany has 5, 10, 15 and 20 year mortgages as the „default“. With the longer ones having a legal exit option (only for the Customer) at the 10 year mark. So in case the interest goes down, you can always refinance after 10 years. Independent of your Bank agreeing to it.

noelsusman 7y ago

US inflation has been stable for almost 40 years.

craftyguy 7y ago
I guess it depends on what you mean by 'stable'. Just eye-balling the data here shows there are historical swings of around ~4-5% on a per-year basis: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/ https://www.usinflationcalculator.com/inflation/historical-i... And of course the 2008 'financial crisis' didn't really result in 'stable inflation' in the US within the last 40 years.

lumost 7y ago

Having personally just purchased a home in the US I can say that a 400 bps increase in a variable interest rate would effectively double my housing cost, and place my home underwater as the Total Cost of Ownership would more than double over 30 years. If the interest rates increased by 600 bps to the maximum of the last 30 years I'd unavoidably default and declare bankruptcy. On a per consumer level a variable rate is much higher risk, even in countries with highly variable inflation rates some fixed form of incomes will not inflate uniformly with the economy and a variable rate would increase the rate of defaults. On the other hand the loan terms and risks are determined once at loan origination where it's quite feasible for a financial institution to hedge out any long term inflationary risk.

xfitm3 7y ago
What is bps in this context?
- SilasX 7y ago
  Basis points, which are a hundredth of a percent on an interest rate, eg “6% is 200 bps more than 4%.”
nvarsj 7y ago
Oh yes, it's a big risk. I think this is at least one reason why policy makers are so hesitant to raise rates. Especially in places like the UK, where many home owners are highly leveraged assuming a low interest rate, yet only have 3-5 year fixed rates. I wouldn't be surprised if there were a large increase in defaults if the interest rates went up here. It would probably bring home prices down to more reasonable levels as well.