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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