Should we move to US style mortgages?

nesf

From: http://www.ronanlyons.com/2011/11/08/hey-enda-leave-those-banks-alone/

Especially the latter half of the post.


Basically regular US mortgages work by the bank issuing a 30 year bond to investors at a constant non-varying interest rate, adding a percentage to this interest rate and lending to a customer at this new rate. The rate never changes, the consumer is protected from interest rate shifts and the customer can make concrete repayment plans as repayments never vary.

Now, the thing is, you also don't benefit from drops in interest rates and if you take out your mortgage during a high interest rate period you can end up with an expensive mortgage during a low interest rate period etc.


What do people think, would this be a good option for Ireland and should the ICB and Government be looking into setting up such a market for long term mortgage bonds through policy?

woodoo

I think its a good idea. The variable interest rates are annoying if money is tight.

thebman

Don't we have fixed rate mortgages already? It is just people went with variable rate during the boom because the rates were so low.

nesf

thebman wrote: »

Don't we have fixed rate mortgages already? It is just people went with variable rate during the boom because the rates were so low.

They're very rare though. This would be moving fixed rate to being the norm and moving bank borrowing from short term to long term borrowing too which would eliminate interest rate exposure for banks on their mortgage books.

thebman

Oh ok my brother changed his to a fixed rate from a variable a few years ago so I'm not sure the banks are all against it, I think it is most the borrower that wants to take the gamble that they will have low interest rates for most of the life of their mortgage.

I never saw the sense of picking a variable interest rate over a fixed one myself.

SBWife

Most fixed rates here are only for a limited period of time 3 or 5 years etc. whereas in the US they are traditionally for the length of the mortgage.

People in the US have tended to refinance as interest rates decline and would often take equity (if there is any) out when they do this given they're already paying fees and getting a valuation. The result is that there are on average higher transaction costs associated with US mortgages over the life of the property ownership, as a resetting of rates takes the retirement of one mortgage and the writing of another.

Xenophile

Fixed is good.......certainty is good in this area.....put away the contracts out of sight out of mind, dont bother to read about them or listen to news or pay any attention to them, it's a done deal, get on with the rest of your life, leaves your mind free to be creative in other areas.

Permabear

This post has been deleted.

nesf

Permabear wrote: »

This post had been deleted.

Refinancing isn't free though. Variable rate mortgages get this bonus as a freebie in exchange for being exposed to other risks.

SBWife

Historically refinancing has also added to higher LTV ratios. As I mentioned previously when going through the hassle and expense of remortgaging many homeowners also took out equity and extended the life of their mortgage. This is why you're seeing significant numbers of older people who were homeowners long before the the bubble inflated running into difficulties in the US. In Ireland these folks are for the most part sitting pretty paying off the last years of their comparatively small mortgages.

Plus Lyons is off on how the banks fund the mortgages, as is the case here they lend long and borrow short. If US banks did what he postulates the S&L Crisis would never have happened let alone the more recent debacle.

nesf

Yeah the temptation is always there to take out a little something for one's self. Borrowing long to spend short is a terrible, terrible idea but people are easily mugged by a nice few thousand dangled in front of them.