In the United States, millions of homeowners have fixed-rate mortgages that last for the entire life of their loan. They know what they will be paying not just next year, but potentially for the next 20 or 30 years. And, if interest rates fall, they can usually refinance and benefit from lower rates, whilst if rates rise, they are protected. The world’s risks are not dumped on households as they are in Britain.
In this video, I explain how the American mortgage system works and why it delivers a level of security that most British homeowners can only dream of. I look at the role of Fannie Mae and Freddie Mac, the government-backed institutions that help underpin much of the US mortgage market, and explain how their guarantees make long-term fixed-rate lending possible.
Spud does not explain two things.
1) Fannie and Freddie both went bust as a result of this structure
2) Americans pay an interest rate premium over UK mortgages. Someone, somewhere, has to carry that risk of refinancing as rates fall. In a fixed rate for term system that payment will be – is – in the form of an interest rate premium on all loans made. That’s just how that system works. A floating rate system is cheaper, at any given underlying base rate, than a fixed rate one. Jus’ one of those things. Also, one of those things that is well known. Except, obviously, to Spud.
The solution to this is as always – crystal clear:
If the current conflict pushes up energy prices, the sensible response is to identify precisely where the inflationary pressures are arising and to address them directly.
That may mean we need windfall taxes.
Let’s tax even more when the tax take is at its highest ever recorded.
It may mean we need price controls, or even rationing, in some markets.
Which has a remarkably effective record of causing abject poverty
It may mean that income support for vulnerable households might be necessary.
To me I’d argue that stressed households need a reduction in taxation, less legislation and fewer state employees wearing lanyards
It might even mean that increased public investment is required to accelerate the transition away from dependence on fossil fuels.
Alternatively a levy could be imposed on those peddling obvious falsehoods like Nut Zero in lieu of incarcerating them for their own safety as well as that of the wider community
All of those options address the source of the problem. Higher interest rates do not. They simply redistribute pain.
I’d agree all my options
Would effectively address much of the inflation which people like yourself have caused.
I note Trumps’ public investment to keep coal burning power stations running. Thus saving the gas needed to back up those ‘fuel-free’ renewables.
And of course the cost of building the renewables themselves.
In the US the mortgagepayer’s risks are dumped on the taxpayer as they are not in Britain.
Funny how stuff works: I know somebody with a mortgage in Euros who’s got 2% fixed for four years; it then moves to a floating rate but with no penalties for overpayment.
Who subsidises which risk there? No idea.
, if interest rates fall, they can usually refinance and benefit from lower rates, whilst if rates rise, they are protected
Ah, the reverse ratchet. Which works until the spring goes boing.
If a UK borrower really really wants a full-term fixed-rate loan, go out there any buy one. That’s the whole point of markets, if there’s demand somebody somewhere will supply, but as with anything, you have to pay for it.
Yeah, but then he goes straight on to:
He doesn’t want to pay the market price, he wants taxpayers to subsidise it.
The government-backed institutions *that became insolvent*.
A typical US 30 year mortgage rate has been (traditionally) between 1% and 3% higher than a UK 5 year mortgage. That’s between £3k and £9k p.a. more on a typical £300k mortgage.
That’s what you have to pay to have that certainty. maybe it’s worth paying, maybe not. It’s for the borrower to decide.
Lenders charge more because they are shouldering the risk of interest rate movements.
Spud, of course, doesn’t mention that point.
From recollection about 2-3% above UK mortage interest rates.
You can also buy a long term mortgage here for similar premiums.
You cant exit it cost free though – which is exactly what youd expect.
I’ve just checked with Claude in case anything changed recently and this also has to be taken in to account:
The upper limit for new mortgages is $750k
Tangential:
A lot of US home mortgage refi is divorced women who got the house. They don’t look for a better rate; they look for cash out.
Men are content to build equity in their home. Women want to monetize it – now.
What he (also) neglects to tell is that furhger millions of Americans have adjustable-rate mortgages of various kinds, many of which closely parallel the structure of many UK mortgages. One major difference may be that US ARMs are typically tied to one or more free-matket indices, while most UK ARMs are closely-tied to the Bank of England base rate – a rate (effectively) controlled by the government of the day, which uses it to (try to) manage inflation, among other things. So in the US, mortgage rates are controlled by market conditions. In the UK, mortgage rates are (largely) controlled by the goverment if the day. Mind you, Murphy probably views that as a good thing.
llater,
llamas
Another difference* (and additional risk for US lenders) is that if you’re in negative equity you can give the lender your keys and walk away. In the UK you remain personally liable for the debt.
* based on hearsay, I’m open to correction from our US contributors
The laws vary from state to state – which is why a lot of Wall Street financiers were caught by surprise by the “jingle mail” in California. Banks bought and sold packages of mortgages thinking that they were safe when they were not.
Ah yes. Isn’t the term “non-recourse loans” applicable? Indeedy:-
“A non-recourse loan is a secured debt where the lender’s only remedy in the event of default is to seize the pledged collateral. The lender cannot pursue the borrower’s other assets or income to recover any remaining balance”
Yes, you are perfectly correct, but I didn’t want to have to insert a definition of a technical term in a one-sentence reply.
Whenever I have seen long-term credit agreements the refinancing opportunity is also accompanied by a pre-payment penalty, and what a surprise – that penalty works out to be about the value of the reduced interest rate over the remaining term. I suppose it’s not such a surprise, since the agreement sets out the calculation for it to be so. I would be surprised to not see these in residential mortgages, but I deal in commercial stuff, so maybe / maybe not.
Early payoff penalties are illegal in South Carolina. Presumably other states, too.
Innumerate lawyers …
…and innumerate populist legislators.
In the UK forbearance is quite easy. Tell the bank you can’t afford the full payments, maybe you’ve taken a wage cut, or one of your house’s wage earners have left home, the bank will let you go on interest only payments. I knew one guy who did this for 15 years, wasn’t bothered that his capital share of the house was static, but a few years is more common. I wonder if US banks are as flexible, genuinely don’t know.
My oldest brother got a house in Atlanta with an interest only loan. Only time I ever heard of it. I thought it dumb. But he has all sorts of financial advisor credentials, so who am I?
That is because the Building Societies were set up to enable working men to buy homes for their families, not to make profits and their is a residual of the original purpose embedded in their structures. I could not get a mortgage in my 20s or early 30s, because I was a bachelor and not part of the demographic that they sought to help, despite being an excellent financial “risk”. The initial reaction of Halifax or Leeds Permanent or Bradford & Bingley or … to being told their borrower has lost his job is to sympathise and seek ways to enable his family to keep their home.
According to Spud, 2008 is something that happened to other people.
Today, as I look around my Minnesota USA real estate listings, I see that a 30-year fixed-rate mortgage is pegged at 6.49%, while a shorter variable-rate (set monthly based on market indices) is 6.54%.
Seems dumb to choose the variable.
It’s just much harder to qualify – to get a banker to loan to you – for the 30-year.