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.
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