Hi I was listening to a pod cast and they mentioned how Americans can lock in a mortgage interest rate for 30 or 15 years. In canada you can lock in a rate from 1 to 10 years but the average is 5 years. Also US banks will offer lower interest rates for the entire term of the mortgage. Aren’t the banks losing out on potential future profits doing this?
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There are several factors that play into this (likely)
1) Americans, on average, move homes very often compared to other countries in Europe and most other developed countries. It is very likely that although the rates are locked to 15 or 30 years, few loans actually are kept to the full term.
2) Banking in the US, is still fairly competitive at the retail end. There are banks, credit unions, regional/local banks, national banks etc. Banks have to keep their products competitive to attract loan customers. Most banks don’t keep mortgages on their books and earn profit through loan origination fees. Which leads to…
3) The secondary market is very deep and liquid in the US. There are lots of funds that seek long term capital protection (pension funds, insurance etc) and would prefer fairly certain but lower returns for their portfolio. These funds can repurchase loans from retail banks (or purchase securities backed by these loans) which means banks can circulate their money more quickly.
4) The US is seen as a safe harbor for savers and investors from other countries. On top of institutional investors, there is also a lot of money coming from overseas into the US market. Part of these funds also buy up loan securities.
OK. Not very ELI5 but hopefully you get the gist. The US is a large market, seen as safe, very liquid and highly competitive.
Also in The Netherlands it’s possible to lock in your mortgage interest rate for up to 30 years. And most home buyers do in fact take a 20 or 30 years lock in
Canadians USED to be able to get actual 25 year mortgages. Banks moved away from them so they could make more money. My late Father bought the family home in 1963 with a 25 year mortgage, with interest in the mid-single digits. By the late 70’s,, early 80’s, when his savings account and investments were earning double digit interest, his mortgage was still that mid-single digit interest, and he was laughing his ass off.
This exists because of US government policy that arose in the wake of the Great Depression where variable rates caused many people to lose their houses.
The US responded afterwards by passing laws that established giant mortgage buying companies (Fannie Mae/Freddie Mac) that are government sponsored enterprises. These companies buy mortgages written by banks, with some risk underwritten by the government.
This reduces risk exposure for the retail-level banks so they can write notes with a 30 year fixed rate repayment period because they don’t have to carry the risk of rates rising dramatically during the life of the mortgage.
Wait…
Am I at 51 years old and having bought 4 houses and sold 3 just learning today that there are first world housing markets out there where a fixed-rate mortgage isn’t even a thing?
I’m about to go curl into bed and spoon my 3.3% 30 year fixed.
They would lose out on customers if they didn’t offer fixed rates. A lot of people are only willing to take out a fixed rate loan and not a variable rate loan.
Whoever is doing it, stop downvoting correct answers.
Because they have an series of organisations funding this (Fannie Mae, Freddie Mac), which pretty much have gone bankrupt, and are constantly bankrolled by government tax money because otherwise everyone would lose their house.
It’s basically socialism at this point, which is pretty hilarious for the US.
And if you try and suggest that to a Canadian, they gasp as if it’s some giant impossibility. That’s how all mortgages should be.
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