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For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rat

by pavlov 5y ago

For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rate. So rate increases generally only affect those buying, not those who already own. In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero. (I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)

cmrdporcupine 5y ago
Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance. Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
- s1artibartfast 5y ago
  I couldn't imagine buying a house without 30 year fixed. Do many people loose their houses when rates go up? I would be terrified.
  - pja 5y ago
    30 fixes only exist in the US thanks to government intervention in the mortgage market to underwrite that risk for the banks. In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years. I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
    - s1artibartfast 5y ago
      I get that the US is exceptional. I just wonder how people deal with that downside.
      - cmrdporcupine 5y ago
        In the past (when high rates were a thing) by being more cautious about their purchases. Certainly that's how my wife and I have been, while everyone else has been partying and living potentially well beyond their means. Guess we're suckers.
        s1artibartfast 5y ago
        In this context, what is beyond ones means? IS buying a house at a 5% rate when 10% would be too much beyond your means? In a place like California, that 5% change could be half of your salary. If the cautious approach is only buy a house if you can handle a 2-3X rate hike, then individuals would never own and perpetually rent from companies.
        cmrdporcupine 5y ago
        Well, in Canada the majority (68.55%) are homeowners, not renters, so no, that's not how it's working. Toronto and Vancouver housing markets are as bad as (or worse than) the Bay Area for housing prices, especially when you factor in people's incomes. In reality, higher rates or the risk of them puts downward pressure on housing prices. A huge component of the price of homes comes from the easy availability of the actual product: housing loans. Almost everyone out there just gets the biggest mortgage that the bank approves them for. They go to the bank and say "what will you give me" and then go look for prices around that cost. Or get in bidding wars up to that level. And the banks are so underwritten by government guarantees that they're willing to take big risks here. It just drives prices higher and higher. We never had the 2008 housing price crash that happened in the US, and things have just continued to climb. It's possible that we'll have a huge crash at some point, it's well overdue. But I've given up on waiting for that to happen.
  - harshalizee 5y ago
    That was pretty much what happened that led to the 2008 housing crash. A lot of people bought houses over leveraged on a variable rate that went up and couldn't afford to make payments on their mortgage.
xuki 5y ago
It does affect people who already bought a home, because when interest rate changes, home price will change too. It's not a problem when equity increases, but in the other direction it could be.
- pavlov 5y ago
  I think that's related to another somewhat unique feature of the American housing market: home equity loans seem to be quite popular. (I.e. loaning money against the paid-off equity in your primary residence. That's a financial product that I've never even heard of in my home country.) If you're on a fixed-interest mortgage, you don't plan to move and you don't have a home equity loan, it seems to me that you don't need to care at all about interest rate and home price fluctuations.
adamsmith143 5y ago
That's interesting. Generally those would be called Adjustable-Rate Mortgages in the US and they are seen as pretty toxic. A major cause of the 07-08 crash can be attributed to those loans and their rates suddenly skyrocketing over a short period of time to the point that millions could no longer afford their monthly payments and defaulted.

by pavlov 5y ago

cmrdporcupine 5y ago

Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance. Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.

s1artibartfast 5y ago
I couldn't imagine buying a house without 30 year fixed. Do many people loose their houses when rates go up? I would be terrified.
- pja 5y ago
  30 fixes only exist in the US thanks to government intervention in the mortgage market to underwrite that risk for the banks. In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years. I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
  - s1artibartfast 5y ago
    I get that the US is exceptional. I just wonder how people deal with that downside.
    - cmrdporcupine 5y ago
      In the past (when high rates were a thing) by being more cautious about their purchases. Certainly that's how my wife and I have been, while everyone else has been partying and living potentially well beyond their means. Guess we're suckers.
      - s1artibartfast 5y ago
        In this context, what is beyond ones means? IS buying a house at a 5% rate when 10% would be too much beyond your means? In a place like California, that 5% change could be half of your salary. If the cautious approach is only buy a house if you can handle a 2-3X rate hike, then individuals would never own and perpetually rent from companies.
        cmrdporcupine 5y ago
        Well, in Canada the majority (68.55%) are homeowners, not renters, so no, that's not how it's working. Toronto and Vancouver housing markets are as bad as (or worse than) the Bay Area for housing prices, especially when you factor in people's incomes. In reality, higher rates or the risk of them puts downward pressure on housing prices. A huge component of the price of homes comes from the easy availability of the actual product: housing loans. Almost everyone out there just gets the biggest mortgage that the bank approves them for. They go to the bank and say "what will you give me" and then go look for prices around that cost. Or get in bidding wars up to that level. And the banks are so underwritten by government guarantees that they're willing to take big risks here. It just drives prices higher and higher. We never had the 2008 housing price crash that happened in the US, and things have just continued to climb. It's possible that we'll have a huge crash at some point, it's well overdue. But I've given up on waiting for that to happen.
- harshalizee 5y ago
  That was pretty much what happened that led to the 2008 housing crash. A lot of people bought houses over leveraged on a variable rate that went up and couldn't afford to make payments on their mortgage.

xuki 5y ago

It does affect people who already bought a home, because when interest rate changes, home price will change too. It's not a problem when equity increases, but in the other direction it could be.

pavlov 5y ago
I think that's related to another somewhat unique feature of the American housing market: home equity loans seem to be quite popular. (I.e. loaning money against the paid-off equity in your primary residence. That's a financial product that I've never even heard of in my home country.) If you're on a fixed-interest mortgage, you don't plan to move and you don't have a home equity loan, it seems to me that you don't need to care at all about interest rate and home price fluctuations.

adamsmith143 5y ago

That's interesting. Generally those would be called Adjustable-Rate Mortgages in the US and they are seen as pretty toxic. A major cause of the 07-08 crash can be attributed to those loans and their rates suddenly skyrocketing over a short period of time to the point that millions could no longer afford their monthly payments and defaulted.