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U.S. 30-year fixed-rate mortgage an ‘outlier’

Mitchell Hartman Oct 14, 2015

U.S. 30-year fixed-rate mortgage an ‘outlier’

Mitchell Hartman Oct 14, 2015

When the U.S. Federal Reserve begins raising short-term interest rates — later this year or early next year — longer-term mortgage rates will likely follow suit. That will be sad news for anyone who’s been waiting to buy a home. And it’ll be of little concern to anyone who has locked in a historically low mortgage rate over the past few years and can count on their rate staying that low for a full 30 years.

The relatively safe, stable, predictable 30-year fixed-rate mortgage is favored by about two-thirds of American homeowners. And it helps explain why homeownership is so common in the U.S. compared to some other developed economies.

In England, France, Germany, Italy and Spain, for instance, people tend to get mortgages that are variable-rate, or shorter-term — for 10 or 15 years, said Jacob Kirkegaard at the Peterson Institute for International Economics. Mortgage interest is typically not tax deductible or only benefits from a very limited tax deduction, which further increases the cost and decreases the financial benefit of homeownership.

“In many European countries, the financial system is not set up to provide a cheap, liquid and therefore widely available 30-year fixed-rate mortgage,” Kirkegaard said. “Because it is not offered at a price that is anywhere near affordable for them, Europeans live with a kind of inherent uncertainty about future interest-rate developments that would be hard for many Americans to stomach.”

Kirkegaard said that in many European countries, banks originate and then hold mortgages in their portfolios for the duration of the loan. A fixed-rate long-term mortgage would saddle the bank with undue financial risk if inflation spiked —as has often happened in the past in some weaker European economies.

Meanwhile, the U.S. housing-finance system is set up to encourage homeownership, said Guy Cecala, publisher of Inside Mortgage Finance, in part by spreading risk and increasing liquidity, so that the 30-year fixed-rate mortgage can be the norm, regardless of prevailing interest rates and inflation prospects.

“The U.S. is an outlier  it’s pretty phenomenal,” said Cecala. “Nobody expects interest rates for the next 30 years to remain at 3.75 percent. In fact, they expect them to go up.”

That risk of future interest-rate change is taken on by investors, who buy up loans bundled into mortgage-backed securities (the mortgages, subject to uniform underwriting standards, are typically guaranteed by the government-backed mortgage-finance companies Fannie Mae and Freddie Mac). This process shifts some of the financial risk of a mortgage away from the homeowner and the originating bank, making capital for additional mortgage lending more available and making homeownership more affordable.

Not so in Germany, where fewer people own. Tina Siekmann is a public radio journalist in southwestern Germany. She is in her mid-50s and just bought her first apartment.

“Buying a house and paying a mortgage is something big in Germany,” Siekmann said. “People are very careful about this. When you buy a house or a flat in Germany, you will likely stay there. You will raise your kids there, and you will have this home for your entire life. It’s unusual to sell your house after a few years, and go somewhere else and buy another house.”

Kirkegaard pointed out that in Germany, most people save by putting money in the bank. Because homeownership is more expensive, less tax-advantaged and thus less common, it is not typically a vehicle for accumulating wealth. In the U.S., by contrast — with its affordable, predictable and tax-deductible mortgages — homes are seen by many as an investment to sell later or borrow against for education or retirement.

Correction: Tina Siekmann’s name was misspelled in an earlier version of this story. The text has been corrected. 

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