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Daniel Booth · 21-07-2012, 04:29 PM

I saw someone mention about these on another thread and just wondering if anyone knows why?

John Corey · 21-07-2012, 07:53 PM

30 years fixed loans secured by a mortgage did not exist in the USA before a government entity was created to buy up loans and then repackage them into 30 year bonds. In other words, you need a secondary market that is interested in issuing bonds collateralized by the loan book assembled. In the USA, Fannie Mae was created first and then Freddie Mac can along.

The Dutch have a similar set up so they have long term fixed loans.

Some will say that there is little demand for a long term fixed loan agreement. Most tend to think a long term fixed loan will cost more than a short term agreement. In theory that sounds correct. The 30 year fixed in the USA for an owner occupant has been under 4% so market reality implies that even a long term fixed can still be very competitive with the right secondary market.

Angela O'Connor · 21-07-2012, 08:36 PM

In Germany it is the norm to take out a mortgage over the whole term. I am not sure how it works but it might have to do with the fact that saving with a building society for many, many years is a common thing to do. It's a saving contract with regular payments and a certain number of years. The government supports it with tax allowances on the savings up to a certain sum. At the end of the contract the saver gets a bonus and a preferred, lower mortgage rate over twice the sum saved.

The IMF published a paper stating:
"German mortgage funding is very much bank deposit-based, with capital markets-based funding less than one-fifth of outstanding loans. By contrast, about twothirds of all mortgages in the United States are funded in capital markets."

I am not a financial expert and have no idea if that explains it, but maybe John C. or someone else will know.

Kevin Wright · 21-07-2012, 10:21 PM

Partly because UK mortgage lenders dont want to offer them and US mortgage lenders do; partly because UK consumers dont want them.

Also, the remortgage market is infinitely more active in the UK than other countries, where people get a mortgage and stick with the lender through thick and thin (as UK borrowers used to do prior to the 80's); not remortgaging to get a better rate, pull out equity, consolidate debt etc....

7 and 10 year fixed rate are offered by a few UK lenders but people are generally unwilling to tie themselves in for that long, as they might want to remortgage and dont want to lumber themselves with punative redemption penalties. By contrast German borrowers never think about remortgaging so see no reason not to commit to long term loans.

Daniel Booth · 22-07-2012, 12:14 AM

Thanks for the responses guys.

John Corey · 22-07-2012, 12:53 PM

Kevin,

I think you are describing symptoms rather than why the UK and USA are different.

In the USA it is mostly true that there is no charge for an early repayment of the loan. Borrowers on a long term (30 year fixed) loan can repay at any time. They will do this when they want to lock in a lower rate with a new loan or they will do this when they sell as loans are not portable.

Second, the long term rates are pretty low. For the last 6-12 months the 30 year rate was below 4%. 4% in the UK locked in for 30 years with no exit charges would sell like hotcakes. Lenders can not buy the money in the wholesale market so they can not offer the loans.

Angela,

A mortgage market supported by short term funding, i.e., retail deposits, leads to serious problems. When the rates rise on the deposits, the lender is left collecting less from the mortgage borrowers than the deposits are costing the lender. Borrowing short term (deposits) while lending long is a very risky business that few will engage in. If the lender has to borrow short to lend long, they will keep the loan terms flexible so they can raise the rate as their cost of funding rises.

Bottom line?

You want to run a matched book. If you lend long at a fixed rate, you want to borrow long at a fixed rate so you do not have problems later. If you can only borrow short term (despots, over night funding in the wholesale market), then you lend short or have other ways to reset the loan terms when your margins get squeezed.

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