You may have seen headlines questioning whether a 50-year mortgage would be a good or bad idea, or how it is just one of several ideas floated by the current administration to address current housing affordability issues. However, there is one common thread among the debates: The U.S. mortgage market is weird and vastly different from other industrialized countries. So today, let’s talk about how different it is.
So uniquely American
As one analyst told CNBC, “The 30-year fixed-rate mortgage is a uniquely American construct.” While other countries have fixed-rate and long-term mortgages, they are generally not found together. For example, Canada offers 25-year mortgages, but the actual fixed-rate terms of the mortgage are much shorter and are renegotiated at regular intervals throughout the duration of the mortgage. Canadian mortgage terms can last for as short as six months or as long as ten years, but most mortgage holders choose a term of 5 years or less, and refinancing is just a regular part of homeownership. Similarly, fixed-rate mortgages in the U.K. typically don’t span longer than five years, and the same is true in many other industrialized countries around the globe.
So why is the U.S. so different? Not surprisingly, it has a lot to do with the “American Dream.”
Tying homeownership to the American Dream
A recent survey of U.S. adults found that a majority of Americans consider owning a home a key component of the American Dream. However, during the Great Depression, the mortgage market in the United States was a mess, with literally thousands of foreclosures a day. This prompted the government to step in and create new programs to help stabilize the market. The Home Owners’ Loan Corporation (HOLC) was created in 1933 as an emergency agency to refinance shaky mortgages and stop the avalanche of foreclosures. Shortly after, the Federal Housing Authority (FHA) was established, creating government entities to guarantee loans, establish uniform lending standards, and encourage homeownership at a time when many Americans were struggling to afford it.
Suddenly, with guarantees from the government, banks were more willing to approve mortgages and stretch out loan terms from the typical 5-7 years to 15 and 20 years. These longer loan terms opened up homeownership for many Americans, and when the 30-year mortgage was introduced in 1948 for new construction (and later in 1954 for existing homes), the smaller payments made them much more popular for buyers than initially expected. Today, nearly 90 percent of new mortgages in the U.S. are 30-year fixed-rate.
Additionally, these government-backed loans are considered safe and very attractive to investors. This has allowed more funds to be available for homebuyers to achieve that American Dream.
Some other differences
Long-term fixed-rate mortgages aren’t the only way the U.S. mortgage market is different from many of its peers. For example, in the U.S., interest you pay on your primary residential home may be tax-deductible on your federal tax returns. This isn’t always the case in other places, but it is another way for the U.S. government to encourage homeownership – even if that tax deduction isn’t actually available to many homeowners.
Another example of something that is more common abroad than in the U.S. is prepayment penalties. It is very uncommon for fixed-rate mortgage terms in the U.S. to include fees for paying the loan off before the predetermined loan term or making extra payments throughout the year. However, in Canada and parts of Europe, where fixed-rate loan terms are for shorter periods, mortgage terms may include a limit on how much extra in payments a person can make in exchange for a lower interest rate during that period.
Something the U.S. does not have, but other countries do, is portable mortgages. A portable mortgage “allows a borrower to transfer their existing mortgage and mortgage rate to a new property when they move, instead of taking out a brand-new loan.” Although the idea sounds like a great way to address people who don’t want to give up their 2-3% interest rates, experts have noted that it wouldn’t work with the U.S. system the same way it does abroad, and it likely wouldn’t solve affordability issues.
