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January 28, 2007
Cross-National Comparison of Mortgage Markets
Nice and eye-opening comparison in today's L.A. Times of cross-national differences in mortgage markets:Canada: Mortgages rarely have rates that are fixed for more than five years. And they almost always come with "yield maintenance penalties" that guarantee lenders a minimum return over the fixed-rate period.
When the loans roll over -- when the period of fixed rates expires -- borrowers select another fixed-rate term ranging from one to five years at the then-current mortgage rate.
Great Britain: Variable-rate mortgages dominate here. These are the English version of our adjustable-rate mortgages. But unlike our ARMs, which usually come with annual and life-of-the-loan caps that protect borrowers against uncontrolled spikes in their monthly payments, those in Britain are held in check solely by the competition.
When market rates change, lenders in the United Kingdom review what their borrowers are currently paying and decide at their own discretion whether to raise or lower the rate. But if lenders adjust too much (or more than their competitors), borrowers take their business elsewhere.
A number of countries allow buyers to borrow the full value of the property, but the United Kingdom is a rarity in that it permits borrowing up to 110% of the value.
Japan: The Japanese mortgage market has grown rapidly in the last 30 years, according to a report in the Journal of Economic Perspectives.
Bank lending still dominates, and banks offer mostly adjustable-rate mortgages or short-term (typically three-year) fixed-rate loans. Also, down payments average 50% to 60%.
Germany: Borrowers have limited options and usually put down at least 40%. If they want to borrow more than 60%, they can take out a second mortgage for up to an additional 20% of value.
The rates charged on first mortgages are only slightly higher than rates on government bonds with a similar maturity. But if the loans are paid off early, they are required to pay the lender all the interest they would have paid had the loan amortized through to maturity.
Denmark: Their mortgage system, like ours, relies heavily on the capital markets. Consequently, it is the only country to have home loans with most of the key features of those found in the United States. But there are limitations.
For one thing, lending criteria are extremely rigid, much more so than in the U.S. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who make a 20% down payment tend to get the best terms available. But in Denmark, to achieve an 80% loan-to-value ratio, borrowers must take out a variable-rate second mortgage to cover the difference.
Danish mortgages are also "portable," meaning that when owners sell their homes, they can carry their mortgages over to the new house.
France: The country has a remarkably small mortgage market for an economy of its size and sophistication. Yet, by world standards, loan terms are considered consumer-friendly.
More than half the loans there have fixed rates, but the term is typically less than 20 years. Fifteen-year terms are most common. Prepayment penalties are limited by statute, but required down payments are as much as 40%. Also, a borrower's credit record and capacity to pay are deemed more important than the underlying value of the property.
Italy: The market here is small but developing. Still, most loans come with variable rates, short terms, prepayment penalties and low loan-to-value ratios. The average down payment is 50%; the typical term, 10 to 15 years. Moreover, the process of valuing collateral -- appraising -- takes longer than in other countries.
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Good stuff.
Other differences between mortgages have major consequences too. Unlike the US, in Canada the interest on your mortgage is not tax-deductable. This makes the real cost of your mortgage significantly higher.
--Dethe
Mortgage interest was tax deductible in the UK until 1999, but no more. But then we have a VAT of 17.5% (not on mortgage) and general taxation is so high that I do not think we even stop to think about higher cost of mortgage, while shelling out nearly £2 (~US$4) for the smallest Starbucks latte, £1 for a Coke can and £100 for a 400-mile trip between Edinburgh and London...
"Variable-rate mortgages dominate here. ... those in Britain are held in check solely by the competition."
Actually many people take discounted-rate mortgages, which are short-term (2, 3, 5 year) offers on standard variable rate. Vigilant consumers are 'rate tarts' (a retail banking term) and change mortgage providers often, typically when the discounted rate term expires. Although there is competition, consumers often have to pay large exit fees to leave their lenders - this is currently under investigation by the regulator, FSA. I am not sure I would say competition holds anything in check...
"When market rates change, lenders in the United Kingdom review what their borrowers are currently paying and decide at their own discretion whether to raise or lower the rate. But if lenders adjust too much (or more than their competitors), borrowers take their business elsewhere."
Except if one has a discounted rate mortgage as mentioned earlier, one is always affected by base rate movements. Lenders typically raise rates by a much higher margin than the increase in base rate, and do it more swiftly too. They are slower however to pass on rate reductions and those too with smaller margins - another issue causing much chagrin to borrowers. There is still concern that the inertia common to other retail banking products such as current accounts also pervades mortgage markets. Good for lenders, not so good for lazy consumers who do not seek out best deals.
"... the United Kingdom is a rarity in that it permits borrowing up to 110% of the value."
Borrowing that much is rare since few, if any, lenders will lend that sort of money. In this dynamic property market, where prices are forever going up and up, more and more people have to borrow larger multiples of their salaries making over 100% of valuation impossible to borrow. Also different lending rates may apply if one wishes to borrow over £1M (which may be required for too many half-decent homes in London, often under 2000 sq.ft. in area).
Thanks -