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I find the non-US model weird... What are you supposed to do if 3 years into owning a house the rate goes way up? At that point you will have almost no equity

I find the non-US model weird... What are you supposed to do if 3 years into owning a house the rate goes way up? At that point you will have almost no equity and extending the term isn't going to help much. People actually do refinance frequently if rates go down. If they go up naturally they'll keep their lower rate. This does create issues when rates go up a lot like they just did, because it makes it harder for people to move. Fixed rate mortgages do create risk for banks, and some banks have run into trouble recently, although a lot of mortgages are resold by banks and packaged into bonds, either by investment banks or by the "Government Sponsored Entities", Fannie Mae and Freddie Mac.

doubleunplussed 3y ago
Here in Australia, the regulator requires banks to assess your ability to make repayments at an interest rate three percentage points higher than the actual rate. A few years ago it was a floor of 7% rather than a buffer, and they'll probably go back to something like a 2% buffer and a 7% floor (rates increased by more than 3 percentage points in recent times, so looks like a three percent buffer alone isn't enough). But yeah, mostly what happens if rates go up is that you begrudgingly pay it, because most in that situation can afford it (those who have changed circumstances may not be able to, but most can). Edit: also, the fact that mortgage holders are more sensitive to rate increases means (it is thought that) the central bank doesn't need to change rates by as much to get the same effect. If there would be widespread mortgage defaults given a certain sized rate increase, then that probably means the central bank can stop short of an increase that large. So the problem is sort of self-limiting. Rate hikes are designed to induce financial strain, but too much isn't desirable, so central banks don't hike too much on purpose (they sometimes do by accident).
Nursie 3y ago
You’re supposed to be able to afford it if the rate goes up, and build that into your risk model, and rein in your spending. This then means that central bank interest rises have an immediate effect on the spare cash for a wide swathe of the population. You’re also supposed to have at least 20% equity at the get-go in Australia, or you end up having to pay extra for some sort of loss of value insurance (I haven’t looked into this much as it’s not my situation). This is making it hard for young folks to get started in an environment of elevated prices. From my perspective it would be a pretty sweet deal if I could fix my loan for 25 years and only ever revise the rate down! That’s why I was asking - what sort of rates do you actually end up paying, vs the central bank rate at the time?

doubleunplussed 3y ago

Here in Australia, the regulator requires banks to assess your ability to make repayments at an interest rate three percentage points higher than the actual rate. A few years ago it was a floor of 7% rather than a buffer, and they'll probably go back to something like a 2% buffer and a 7% floor (rates increased by more than 3 percentage points in recent times, so looks like a three percent buffer alone isn't enough). But yeah, mostly what happens if rates go up is that you begrudgingly pay it, because most in that situation can afford it (those who have changed circumstances may not be able to, but most can). Edit: also, the fact that mortgage holders are more sensitive to rate increases means (it is thought that) the central bank doesn't need to change rates by as much to get the same effect. If there would be widespread mortgage defaults given a certain sized rate increase, then that probably means the central bank can stop short of an increase that large. So the problem is sort of self-limiting. Rate hikes are designed to induce financial strain, but too much isn't desirable, so central banks don't hike too much on purpose (they sometimes do by accident).

Nursie 3y ago

You’re supposed to be able to afford it if the rate goes up, and build that into your risk model, and rein in your spending. This then means that central bank interest rises have an immediate effect on the spare cash for a wide swathe of the population. You’re also supposed to have at least 20% equity at the get-go in Australia, or you end up having to pay extra for some sort of loss of value insurance (I haven’t looked into this much as it’s not my situation). This is making it hard for young folks to get started in an environment of elevated prices. From my perspective it would be a pretty sweet deal if I could fix my loan for 25 years and only ever revise the rate down! That’s why I was asking - what sort of rates do you actually end up paying, vs the central bank rate at the time?