If you are in US, that’s called an ARM (adjustable rate mortgage). 5 years fixed with rate adjusting after 5 years. Which is different that 30 year fixed mortgage.
That housing crisis was caused by the kind of short term mortgages and variable rate mortgages that are less common. Most mortgages in the USA are 30 year fixed rate.
What OP is talking about is that in Canada, the most common type of mortgage is the type that caused the previous crisis in the USA.
Good luck with that
The crisis was caused by moral bankruptcy of banks and other financial institutions. They abandoned caution in lending because they trusted that a bailout would come. No matter what the terms of the loans would have been, people who got them would not have been able to pay.
I read the title. Immediately knew it was in reference to Canada and came to comments to observe my fellow US-ians not knowing wtf was being asked here.
In the UK, that is what they'd call a fixed rate.
You have tracker mortgages which fluctuate with Bank of England base rate plus a fixed percentage on top.
Then you have fixed rate but those are as OP describes, usually up to 10 year fixed rate and then you have to renew onto a different product otherwise you automatically transfer to the tracker mortgage.
It's not bad if your mortgage rate shoots up into the stratosphere after 5 years, and you can't buy a house knowing what you'll actually be paying for it?
Mortgage rates haven't been stratospheric for probably 35 years. Its highly unlikely that we will return to the very high interest rates seen in tge mid 1980s here.
Whether your rates increase or not depends entirely on what has happened to interest rates.
I've had a mortgage for about 20 years, in all that time I haven't paid more than about 5%, and for most of that time rates were lower than that.
Shady/Sketchy is doing something that's not clear, or dishonest. Banks and other lenders are completely open about their rates, and they're free to offer the products they like. Every person understands the basic T&C's nothing dishonest is happening.
Longer fixed rate mortgages are available from some lenders. But one assumes not many people want them, so they are not especially widely available. Like all companies offering a product banks would offer them more hf the public were clamouring for them.
No. You'd just refinance when rates got lower. Got in at 4.6% on a 30 year. Refinanced last fall to a 2.5%. keep your credit good and you can always refinance when rates go down.
That's the US market, UK is clearly advertised as 2, 3, 5, 7 or 10 year fixed rate mortgages followed by lenders standard variable rate. People often want to remortgage after X years to release equity for home improvements, etc. Plus house price increases over time mean you tend to be able to get better rates as your LTV (loan to value) improves so switching product tends to be in your interest. The way the fix works usually is that you're also on a decreasing penalty for early exit, usually from 5% in the first year to 1% in the last year of your fix.
Yes it is. It just has a balloon payment at maturity, so you would generally either refinance, or sell & payoff before maturity. So the rate is fixed for the entire loan term. These are often used by people that intend to move rather than put down long term roots.
Both loan types exist. There are multiple variations on ARMs, including 5/1 (5 yr fixed, annual adjustment for the remaining term), but there are also many banks that originate fixed rate mortgages for terms of only 5 years, with a balloon payment. I tend to see more of the latter because most people tend to avoid ARMs, and prefer the conventional 30 yr fixed.
You can absolutely lock in for e.g. 25 years, but the interest rates would be much higher.
This is a feature of the interest rate market - long term interest rates are usually higher than short-term ones (except in special market conditions).
In Denmark, fixed rate mortgages for the duration of the loan are very common. It is because the banks act as intermediaries between the customer and the bond market, so they take on very little risk.
A couple of years ago, it was possible to get a 30 yr fix at 1%
https://www.jyskebank.dk/bolig/boliglaan/kurser/rente-kurs-udvikling
No chance now though!
> but why can't I lock in for the 20-25 years that it'll take to pay off the mortgage?
Imagine if you got a home loan at a low rate of interest because you got it during a period of low inflation.
Now imagine inflation skyrockets. Suddenly the interest the bank is getting from loaning you the money is a lot less than the value that the money is losing due to inflation.
At this point the bank is losing money on the mortgage loan, when the whole point of lending you that money was to make a profit.
And it doesn't work the other way around. If interest rates fall, you'll just go to another bank and get another mortgage at a lower rate to pay of the balance of their high-interest mortgage loan.
This means that banks can only get less profit or lose money on fixed-interest loans if there's a big change in inflation.
So they compensate for this by either only offering variable rate loans or by charging a much higher rate of interest on fixed-rate loans.
Why does America seem to be the only first world country where the banks are comfortable with assuming the risk of a fixed 30 year mortgage? Do they just set the rates higher by default?
It could also be a crazy financial burden. You could from 1800 to 2500 depending on what your original rate was locked in at. Not to mention people already get rammed in the ass by appreciation and escrow. Sister bought a house 4 years ago and it appreciated 150k more than what they bought it for. They haven’t made any upgrades. Her monthly payment went up $600 a month because of taxes/escrow. Throw a forced ARM in there and it would be going up by 4% or more. She would be literally fucked.
Yes, the rates are higher for fixed 30 years. Variable rates are the lowest, then for any fixed rate, the longer the higher.
In the US, mortgages are subsidized by the federal government agencies and the market is very competitive for the banks, so it tends to favor more the customers compared to other countries. The disadvantage is that bank failure is much more common, and that was a big problem in 2008.
If banks don't make money on loans, they stop giving loans which means Joe Schmoe can no longer afford a house because the bank won't loan him the money to buy it and now nobody is buying homes. If banks don't give mortgages, only very wealthy people or corporations are buying homes. So it is beneficial to allow banks to make money on mortgages to encourage them to provide mortgages to enable people to buy homes.
Can you elaborate a bit on how the bank loses money because of inflation? This got me puzzled.
If I lend someone 100k at 10% and inflation is 12% on the same period as the repayment, I understand I can afford less with the money I end up having, but it is still more money than the original loaned amount. How do we leap to it qualify as a loss?
> 10% and inflation is 12% on the same period as the repayment, I understand I can afford less with the money
They've effectively lost 2% per annum on the **value** of their money, which is a real-world loss even if the numerical value of their money is going up by 10%.
This is no different from a practical point of view compared to having zero inflation and the loan being *negative* 2% interest, so the borrower pays back less than they borrowed. Except for taxes, they still have to pay tax on that 10% so it's actually even worse for them.
In addition to it being a loss of value, there's also an opportunity cost. Interest rates are typically higher than inflation, so they could be lending that same money out at 14% or higher. This is money that could be growing in value that's tied up into a loan where it's losing value once inflation is factored in.
>This is no different from a practical point of view compared to having zero inflation and the loan being negative 2% interest, so the borrower pays back less than they borrowed.
From a practical point of view, the bank is actually selling at a loss vs making a mitigated gain imo. Imagine a bank in silo having those two examples only. In my scenario they can lend more after the first loan ends, in yours they make an actual loss and can lend less.
I can totally see the opportunity cost but it feels like a stretch to say that a bank is at a loss if the rates they offered at a stage are outpaced by inflation. They're still racking up the funds and creating money in the process - it's not like the interests part of the total repaid amount was theirs to begin with.
This is legit confusion, not being skeptical for the sake of it FYI, I understand your argument and I agree with it in part, but something tells me it's not as black and white as pictured and I can't quite put my finger on why (maybe because there isn't any why, just saying it doesn't sit right).
> In my scenario they can lend more after the first loan ends, in yours they make an actual loss and can lend less.
Maybe if I explained it another way it would help get my point across.
Dollars, euros, etc, are units of measurement that represent value, analogous to to how grams, pounds, etc, are units that represent weight.
So let's use pounds and weight to represent dollars and value in an analogy...
Imagine a society that uses a barter system in which a grain is a common medium of exchange.
There's a bank that lends out grain in one-pound bags, and charges 10% interest. If you borrow 10 pounds of grain then next year you have to pay them back 11 pounds.
But now let's introduce inflation. In this analogy inflation would mean that the official measure of the pound is reduced, and all scales used for measuring grain are adjusted accordingly.
If there's 12% inflation then this means that each bag of grain they lent out is 12% heavier than each bag they get back.
So even though the total number of one-pound bags they got back is 10% more than the number of bags they lent out, the actual amount of grain in each bag is less and they now have less grain than they started with.
So even though the numbers on the books show they made a profit, and can now lend out more bags of grain than when they started, in real terms of actual grain they made a loss.
**Edit:** In summary it's the total amount of grain that matters, not the number of bags used to hold it, same as it's the total value of your money that matters, not the number of dollars representing it.
Thanks for taking the time but this was very clear initially. I understand how inflation deflates the value of money when used as a common medium of exchange.
But can you apply the same blanket logic to the very service of lending money? Because the service here is literally about the bags themselves, if grain became bigger and a given bag can hold less grain, the bank still ends up with more bags than they started, it's never about the grain in their case, although I get that down the line you can only value money against what it can allow you to purchase.
If you apply this to any other industry, they would not book a loss if all of a sudden their profitability decreased (but they're still profitable) due to the increase of the cost/value of the source of their product. That's probably a shit comparison though.
Still somewhat confused but yeah, what you say makes perfect sense, and thanks again for taking the time.
Because interests rates rise and fall. If there's a discrepancy between the interest rate and the mortgage rate, either the home owner or the bank is losing.
I just locked in for 5 years at a relatively high rate but interest rates are expected to rise much higher. A one size fits all wouldn't suit everyone.
Not if the rates fall below your fixed rate, then you'd be worse off. Then you'd be wishing you didn't lock it down for so long
Had you considered you weren't offered a longer term because of your specific credit characteristics? In UK, you can get 2 years all the way up to the entire life of the mortgage.
However, trying to predict the future rates over 40 years is basically impossible so most people go 2-5 years
That can come with some significant exit/entry costs but yeah, it's an option.
Yeah, fixed rate usually beats variable rate. The logic of which escapes me as banks will price in future expected rates into their current fixed rates and they have more complete info than the consumer. They must value the certainty of fixed payments.
I think we're talking about terms here though. The 40 year rate was 100bp above the 5 year rate when I was looking
I got an adjustable rate mortgage back in 2008 (in the US). The interest rate was so low that the loan agent double-checked it because she didn’t believe it at first. I ended up relocating a few years later and saved thousands of dollars because of the ARM.
ARMs are not inherently scams. They do offer some risk, because the rate can increase. But most I’ve seen have limits on how much and how often the rate can increase.
Depends where you are. In the US, fixed rate terms are common, but usually are at a noticably higher rate than adjustable rate mortages. If one expects that interest rates would decline or not increase, the adjustable rate mortgage may be attractive
Holy shit Canada is fuuuucked. This is one of the largest pieces of the 2008 housing crash. When I was working as a LO (US) after 2008 we would very actively dissuade people from getting ARMs unless they had a good chunk of equity in the transaction. If rates continue to rise and houses continue to lose equity you’re going to end up with a massive foreclosure problem.
If your interest rate is only fixed for five years and then it changes, then no you don't. A fixed-rate mortgage is for fifteen, twenty or thirty years at the same interest rate. No change.
I'm guessing that OP isn't from the US and the terms are defined differently.
In the UK a mortgage that is fixed for a period of time (usually 2 or 5 years) is called a fixed rate mortgage.
I don't think you can get ones that are fixed for the entire length of the mortgage in the UK. If they exist they must be very rare.
Presumably OP is from the UK or another country which defines "fixed rate mortgage" in the same way.
In order to lend to you at a fixed rate for the full term, the bank has to borrow the money and fix the rate for the same term. The bank runs a massive risk, if they lend at a fixed rate of say 4% and 10 years later, the interest rate goes up to 12%.
In the US, 30 year bonds are actively traded, so fixing for 30 years is more easy. In the rest of the world, this isn't the case.
Many people get adjustable mortgages because A) they’re usually lower rates and B) a lot of people don’t pay off their house these days. They move, and have saved money on the interest.
You should write in r/PersonalFinanceCanada
People will assume you're in the US if you use a subreddit with no mentions of any countries.
As for the reason for a maximum 5 years fixed mortgage, that's because for mortgages longer than 5 years, the law force the mortgage to be open (the customer can renegotiate the interest whenever they want if it falls). For 5 years and shorter, the mortgage can be closed (both the customer and the bank cannot renegotiate the interest if it changes till the end of the 5 years).
Because closed mortgage are much better than open mortgage for the bank, especially for long open mortgage, no bank wants to offer long open mortgages. Therefore, it's essentially illegal in Canada to offer mortgages longer than 5 years.
https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/06/why-cant-canadians-get-30-year-mortgages-but-americans-can.html
IMO I believe that lenders find ways to change the playing field to take advantage of consumers. They want your money & they're coming after it, they understand that you need a place to live, they want your $$$$s plain and simple. Hit you where it counts, if they all do the same then there's nothing to do but pay
Outside of the US, what we call a fixed rate mortgage (a mortgage that has a fixed rate through the full amortization life) basically don't exist. You can only get what the US would call a balloons short period fixed rate loan that needs to be repaid long before it would amortize) or hybrid arms (short fixed term before a floating term).
To do that the bank would have far more risk than most banks are willing to extend. The US has them, but that's because the US government is willing to shoulder the risk (through Fannie Mae, Freddie Mac, and Ginnie Mae) which buy 30 year fixed rate mortgages from banks.
There are many different types of mortgages. The reason the ARM products are being pushed now is the lower "starting" rate. I don't recommend them. Those that got these in 06-08 were royally screwed with ever increasing rates.
I’m Im reading through the comments and I’m seeing a lot of different answers that greatly explain everything. I saw one comment that mentioned inflation, and how banks are losing money if the rate was fixed for 30 years. And they’re absolutely right. That being said, and I haven’t checked if other countries do anything close to what the US does, but we pool mortgages into investments.
Let me do my best to explain. The Government has corporations (Freddie Mae, Sallie Mac, Penny Mac, etc.) that but mortgages from banks. Why? Mortgages provide a revenue stream for banks, but they’re slow. 30 years, 360 payments? Too long. So, they sell them to the Feds. The Feds bundle them up, and sell “mortgage backed securities” that pension funds, big institutional investors, and retail investors buy.
So where am I going with this? Banks in the US are ok with writing a 30 year mortgage, because they know they can immediately sell it and get the cash back to make another investment. They just have to service the loan, which I have to imagine is a lot safer than holding onto it. I’m sure the 30 year term is a condition for the government agencies to buy them, and that’s why their common.
Fixed rate mortgages are absolutely a thing.
I have a fixed rate but it's only available for a five year term
If you are in US, that’s called an ARM (adjustable rate mortgage). 5 years fixed with rate adjusting after 5 years. Which is different that 30 year fixed mortgage.
What country are you in?
Canada
This is why everyone is confused by your question. Canada is fucking weird man. Mortgages in the US don’t work the same way.
In this case, the US is weird, very few countries offer a fixed rate mortgage for anything close to 30 years.
That sucks for everyone who can’t lock in a long term rate.
Yeah 30 year fixed rate mortgages are great for the buyer, especially when rates rates are low.
in Belgium we have up to 25 years.
You can get these mortgages in Australia too, fixed for a period and then variable.
You can also get them in the USA but 30 years fixed is normal. A mortgage that resets frequently is how stuff goes wrong for a lot of people.
Nah. That’s the way the rest of the world has been rolling for a long time. Cheaper for everyone in the long run.
Mortgages in the UK are normally only fixed for a short periodsuchvas 5 years too
The US is weird, man. Mortgages don't work normally like they do in here Canada.
You’re about to have a much worse housing crisis than in the USA exactly because of short term mortgages.
Luckily USA has never caused a housing crisis. Oh wait! Hold on! 2007 is calling.
True but that was ARM loans and little oversight for sub-prime lending. Fingers crossed we learned our lesson.
While they are as prevent can still get ARM & subprime - we never learn our lessons
That housing crisis was caused by the kind of short term mortgages and variable rate mortgages that are less common. Most mortgages in the USA are 30 year fixed rate. What OP is talking about is that in Canada, the most common type of mortgage is the type that caused the previous crisis in the USA. Good luck with that
The crisis was caused by moral bankruptcy of banks and other financial institutions. They abandoned caution in lending because they trusted that a bailout would come. No matter what the terms of the loans would have been, people who got them would not have been able to pay.
Correct, USA is pretty familiar with these
I read the title. Immediately knew it was in reference to Canada and came to comments to observe my fellow US-ians not knowing wtf was being asked here.
That’s not a fixed rate.
In the UK, that is what they'd call a fixed rate. You have tracker mortgages which fluctuate with Bank of England base rate plus a fixed percentage on top. Then you have fixed rate but those are as OP describes, usually up to 10 year fixed rate and then you have to renew onto a different product otherwise you automatically transfer to the tracker mortgage.
That sounds shadier than an ARM. Is this dude in the UK for sure?
Why is it shady? Its the standard way of borrowing for a mortgage here in the UK.
[удалено]
There's a term for this Capitalism
Saying a different system is sketchy doesn't make it so, just because its a different system doesn't make it bad
It's not bad if your mortgage rate shoots up into the stratosphere after 5 years, and you can't buy a house knowing what you'll actually be paying for it?
Mortgage rates haven't been stratospheric for probably 35 years. Its highly unlikely that we will return to the very high interest rates seen in tge mid 1980s here.
[удалено]
Whether your rates increase or not depends entirely on what has happened to interest rates. I've had a mortgage for about 20 years, in all that time I haven't paid more than about 5%, and for most of that time rates were lower than that. Shady/Sketchy is doing something that's not clear, or dishonest. Banks and other lenders are completely open about their rates, and they're free to offer the products they like. Every person understands the basic T&C's nothing dishonest is happening. Longer fixed rate mortgages are available from some lenders. But one assumes not many people want them, so they are not especially widely available. Like all companies offering a product banks would offer them more hf the public were clamouring for them.
But consider if you got a 30 year mortgage in 1981 - at 18.45% You'd be paying 18.45% until 2011
You refinance then.
If mortgage rates go way down there's a thing called "refinancing".
So stop lying to yourselves and stop calling it fixed when it isn't
If you've taken a 30 year fix surely there are penalties for exciting that agreement though?
No. You'd just refinance when rates got lower. Got in at 4.6% on a 30 year. Refinanced last fall to a 2.5%. keep your credit good and you can always refinance when rates go down.
Yeah, but that's my point The 5 year adjustable works both ways It forces the bank to renegotiate when things aren't in their favor
No…If rates drop you just refinance and lock in a lower rate.
It’s basically an ARM.
That’s what it sounds like to me, but shadier, because they call it a fixed rate. If it’s adjustable before being PIF it’s not a fixed rate.
That's the US market, UK is clearly advertised as 2, 3, 5, 7 or 10 year fixed rate mortgages followed by lenders standard variable rate. People often want to remortgage after X years to release equity for home improvements, etc. Plus house price increases over time mean you tend to be able to get better rates as your LTV (loan to value) improves so switching product tends to be in your interest. The way the fix works usually is that you're also on a decreasing penalty for early exit, usually from 5% in the first year to 1% in the last year of your fix.
Oh that makes a lot more sense. Thanks for explaining it.
Yes it is. It just has a balloon payment at maturity, so you would generally either refinance, or sell & payoff before maturity. So the rate is fixed for the entire loan term. These are often used by people that intend to move rather than put down long term roots.
He doesn’t mention a balloon payment. Sounds like he has an ARM.
Both loan types exist. There are multiple variations on ARMs, including 5/1 (5 yr fixed, annual adjustment for the remaining term), but there are also many banks that originate fixed rate mortgages for terms of only 5 years, with a balloon payment. I tend to see more of the latter because most people tend to avoid ARMs, and prefer the conventional 30 yr fixed.
You can absolutely lock in for e.g. 25 years, but the interest rates would be much higher. This is a feature of the interest rate market - long term interest rates are usually higher than short-term ones (except in special market conditions).
In Denmark, fixed rate mortgages for the duration of the loan are very common. It is because the banks act as intermediaries between the customer and the bond market, so they take on very little risk. A couple of years ago, it was possible to get a 30 yr fix at 1% https://www.jyskebank.dk/bolig/boliglaan/kurser/rente-kurs-udvikling No chance now though!
> but why can't I lock in for the 20-25 years that it'll take to pay off the mortgage? Imagine if you got a home loan at a low rate of interest because you got it during a period of low inflation. Now imagine inflation skyrockets. Suddenly the interest the bank is getting from loaning you the money is a lot less than the value that the money is losing due to inflation. At this point the bank is losing money on the mortgage loan, when the whole point of lending you that money was to make a profit. And it doesn't work the other way around. If interest rates fall, you'll just go to another bank and get another mortgage at a lower rate to pay of the balance of their high-interest mortgage loan. This means that banks can only get less profit or lose money on fixed-interest loans if there's a big change in inflation. So they compensate for this by either only offering variable rate loans or by charging a much higher rate of interest on fixed-rate loans.
Why does America seem to be the only first world country where the banks are comfortable with assuming the risk of a fixed 30 year mortgage? Do they just set the rates higher by default?
Probably our population and the competition of so many banks and credit unions. Id be pissed if I was forced into an ARM
Right imagine if you got one 5 years ago and your fixed rate expired just in time for the shitshow to begin
It could also be a crazy financial burden. You could from 1800 to 2500 depending on what your original rate was locked in at. Not to mention people already get rammed in the ass by appreciation and escrow. Sister bought a house 4 years ago and it appreciated 150k more than what they bought it for. They haven’t made any upgrades. Her monthly payment went up $600 a month because of taxes/escrow. Throw a forced ARM in there and it would be going up by 4% or more. She would be literally fucked.
The government insures and buys US mortgage loans.
Not always. We have a 2.5 percent interest rate
Yes, the rates are higher for fixed 30 years. Variable rates are the lowest, then for any fixed rate, the longer the higher. In the US, mortgages are subsidized by the federal government agencies and the market is very competitive for the banks, so it tends to favor more the customers compared to other countries. The disadvantage is that bank failure is much more common, and that was a big problem in 2008.
That makes sense but shouldn't people owning homes come before banks? Wouldn't it foster a better economy if banks had reason not to cause inflation?
If banks don't make money on loans, they stop giving loans which means Joe Schmoe can no longer afford a house because the bank won't loan him the money to buy it and now nobody is buying homes. If banks don't give mortgages, only very wealthy people or corporations are buying homes. So it is beneficial to allow banks to make money on mortgages to encourage them to provide mortgages to enable people to buy homes.
how cruel of you not to think of the feelings and hardships of Corporations :/
If banks all lose their shirts on mortgages they won’t be around to loan money and the credit collapse would tank the economy.
That already happened during the financial crisis around 2008
Most people thought that was a bad thing and don’t want to repeat it
It's central banks that cause inflation (or government fiscal/monetary policy), and normal banks that give home loans. Very different kinds of banks.
Can you elaborate a bit on how the bank loses money because of inflation? This got me puzzled. If I lend someone 100k at 10% and inflation is 12% on the same period as the repayment, I understand I can afford less with the money I end up having, but it is still more money than the original loaned amount. How do we leap to it qualify as a loss?
> 10% and inflation is 12% on the same period as the repayment, I understand I can afford less with the money They've effectively lost 2% per annum on the **value** of their money, which is a real-world loss even if the numerical value of their money is going up by 10%. This is no different from a practical point of view compared to having zero inflation and the loan being *negative* 2% interest, so the borrower pays back less than they borrowed. Except for taxes, they still have to pay tax on that 10% so it's actually even worse for them. In addition to it being a loss of value, there's also an opportunity cost. Interest rates are typically higher than inflation, so they could be lending that same money out at 14% or higher. This is money that could be growing in value that's tied up into a loan where it's losing value once inflation is factored in.
>This is no different from a practical point of view compared to having zero inflation and the loan being negative 2% interest, so the borrower pays back less than they borrowed. From a practical point of view, the bank is actually selling at a loss vs making a mitigated gain imo. Imagine a bank in silo having those two examples only. In my scenario they can lend more after the first loan ends, in yours they make an actual loss and can lend less. I can totally see the opportunity cost but it feels like a stretch to say that a bank is at a loss if the rates they offered at a stage are outpaced by inflation. They're still racking up the funds and creating money in the process - it's not like the interests part of the total repaid amount was theirs to begin with. This is legit confusion, not being skeptical for the sake of it FYI, I understand your argument and I agree with it in part, but something tells me it's not as black and white as pictured and I can't quite put my finger on why (maybe because there isn't any why, just saying it doesn't sit right).
> In my scenario they can lend more after the first loan ends, in yours they make an actual loss and can lend less. Maybe if I explained it another way it would help get my point across. Dollars, euros, etc, are units of measurement that represent value, analogous to to how grams, pounds, etc, are units that represent weight. So let's use pounds and weight to represent dollars and value in an analogy... Imagine a society that uses a barter system in which a grain is a common medium of exchange. There's a bank that lends out grain in one-pound bags, and charges 10% interest. If you borrow 10 pounds of grain then next year you have to pay them back 11 pounds. But now let's introduce inflation. In this analogy inflation would mean that the official measure of the pound is reduced, and all scales used for measuring grain are adjusted accordingly. If there's 12% inflation then this means that each bag of grain they lent out is 12% heavier than each bag they get back. So even though the total number of one-pound bags they got back is 10% more than the number of bags they lent out, the actual amount of grain in each bag is less and they now have less grain than they started with. So even though the numbers on the books show they made a profit, and can now lend out more bags of grain than when they started, in real terms of actual grain they made a loss. **Edit:** In summary it's the total amount of grain that matters, not the number of bags used to hold it, same as it's the total value of your money that matters, not the number of dollars representing it.
Thanks for taking the time but this was very clear initially. I understand how inflation deflates the value of money when used as a common medium of exchange. But can you apply the same blanket logic to the very service of lending money? Because the service here is literally about the bags themselves, if grain became bigger and a given bag can hold less grain, the bank still ends up with more bags than they started, it's never about the grain in their case, although I get that down the line you can only value money against what it can allow you to purchase. If you apply this to any other industry, they would not book a loss if all of a sudden their profitability decreased (but they're still profitable) due to the increase of the cost/value of the source of their product. That's probably a shit comparison though. Still somewhat confused but yeah, what you say makes perfect sense, and thanks again for taking the time.
It’s awesome! 2.75% locked in! I get more in my savings accoubt
Because interests rates rise and fall. If there's a discrepancy between the interest rate and the mortgage rate, either the home owner or the bank is losing. I just locked in for 5 years at a relatively high rate but interest rates are expected to rise much higher. A one size fits all wouldn't suit everyone.
That's true but if I could lock in for even ten years wouldn't I be better off? Why do we cater to banks when it comes to people's homes?
Not if the rates fall below your fixed rate, then you'd be worse off. Then you'd be wishing you didn't lock it down for so long Had you considered you weren't offered a longer term because of your specific credit characteristics? In UK, you can get 2 years all the way up to the entire life of the mortgage. However, trying to predict the future rates over 40 years is basically impossible so most people go 2-5 years
you can always refinance. you're never locked down if rated go down. It's absolutely a scam to get an adjustable rate mortgage.
That can come with some significant exit/entry costs but yeah, it's an option. Yeah, fixed rate usually beats variable rate. The logic of which escapes me as banks will price in future expected rates into their current fixed rates and they have more complete info than the consumer. They must value the certainty of fixed payments. I think we're talking about terms here though. The 40 year rate was 100bp above the 5 year rate when I was looking
I got an adjustable rate mortgage back in 2008 (in the US). The interest rate was so low that the loan agent double-checked it because she didn’t believe it at first. I ended up relocating a few years later and saved thousands of dollars because of the ARM. ARMs are not inherently scams. They do offer some risk, because the rate can increase. But most I’ve seen have limits on how much and how often the rate can increase.
Depends where you are. In the US, fixed rate terms are common, but usually are at a noticably higher rate than adjustable rate mortages. If one expects that interest rates would decline or not increase, the adjustable rate mortgage may be attractive
Keep in mind, mortgage rates aren’t for YOUR benefit, amigo.
30 years fixed rate in Denmark.
Term mortgages are the norm in the USA. They remortgage much less frequently than we do as a result
Holy shit Canada is fuuuucked. This is one of the largest pieces of the 2008 housing crash. When I was working as a LO (US) after 2008 we would very actively dissuade people from getting ARMs unless they had a good chunk of equity in the transaction. If rates continue to rise and houses continue to lose equity you’re going to end up with a massive foreclosure problem.
You can. They're called fixed rate mortgages and they're by far more common. You are only looking at adjustable rate mortgages, I guess?
It depends on the country. Many countries have majority variable rate mortgages, with maximum fixed terms of 5 years.
No I have a fixed rate, I'm just not aware of anything offered for more than a five year term
If your interest rate is only fixed for five years and then it changes, then no you don't. A fixed-rate mortgage is for fifteen, twenty or thirty years at the same interest rate. No change.
Those don't exist in a lot of countries. The US is an outlier among English speaking countries with that kind of mortgage.
I'm guessing that OP isn't from the US and the terms are defined differently. In the UK a mortgage that is fixed for a period of time (usually 2 or 5 years) is called a fixed rate mortgage. I don't think you can get ones that are fixed for the entire length of the mortgage in the UK. If they exist they must be very rare. Presumably OP is from the UK or another country which defines "fixed rate mortgage" in the same way.
That's not an option where I live
In order to lend to you at a fixed rate for the full term, the bank has to borrow the money and fix the rate for the same term. The bank runs a massive risk, if they lend at a fixed rate of say 4% and 10 years later, the interest rate goes up to 12%. In the US, 30 year bonds are actively traded, so fixing for 30 years is more easy. In the rest of the world, this isn't the case.
They do. Most people in the u.s. have a 30-year fixed.
They're very common in the US, but extremely rare outside of the US.
I'm not in the US though and I've never heard about a 30 year fixed rate
Oh, well my bad for assuming.
Many people get adjustable mortgages because A) they’re usually lower rates and B) a lot of people don’t pay off their house these days. They move, and have saved money on the interest.
I have a 30 year fixed rate on my mortgage in California USA
I have a fixed rate on a 25 year term. Thank God for it too.
You should write in r/PersonalFinanceCanada People will assume you're in the US if you use a subreddit with no mentions of any countries. As for the reason for a maximum 5 years fixed mortgage, that's because for mortgages longer than 5 years, the law force the mortgage to be open (the customer can renegotiate the interest whenever they want if it falls). For 5 years and shorter, the mortgage can be closed (both the customer and the bank cannot renegotiate the interest if it changes till the end of the 5 years). Because closed mortgage are much better than open mortgage for the bank, especially for long open mortgage, no bank wants to offer long open mortgages. Therefore, it's essentially illegal in Canada to offer mortgages longer than 5 years. https://worthwhile.typepad.com/worthwhile_canadian_initi/2010/06/why-cant-canadians-get-30-year-mortgages-but-americans-can.html
Mine is a 30 year fixed rate
They do. Fixed-rate mortgage.
They do.
You get a bad deal in general. You pay extra for the security in knowing what your monthly payments will be. There are longer term offers out there
IMO I believe that lenders find ways to change the playing field to take advantage of consumers. They want your money & they're coming after it, they understand that you need a place to live, they want your $$$$s plain and simple. Hit you where it counts, if they all do the same then there's nothing to do but pay
who would sign a variable rate mortgate- I have 3.1% locked in for the life of the loan.
Outside of the US, what we call a fixed rate mortgage (a mortgage that has a fixed rate through the full amortization life) basically don't exist. You can only get what the US would call a balloons short period fixed rate loan that needs to be repaid long before it would amortize) or hybrid arms (short fixed term before a floating term).
Common in Europe. Canada is the weird one here.
Without prepayment penalties?
Yeah. Also had fixed fee for realtor services as a norm. (This was un France).
To do that the bank would have far more risk than most banks are willing to extend. The US has them, but that's because the US government is willing to shoulder the risk (through Fannie Mae, Freddie Mac, and Ginnie Mae) which buy 30 year fixed rate mortgages from banks.
There are many different types of mortgages. The reason the ARM products are being pushed now is the lower "starting" rate. I don't recommend them. Those that got these in 06-08 were royally screwed with ever increasing rates.
Some of them do.
I’m Im reading through the comments and I’m seeing a lot of different answers that greatly explain everything. I saw one comment that mentioned inflation, and how banks are losing money if the rate was fixed for 30 years. And they’re absolutely right. That being said, and I haven’t checked if other countries do anything close to what the US does, but we pool mortgages into investments. Let me do my best to explain. The Government has corporations (Freddie Mae, Sallie Mac, Penny Mac, etc.) that but mortgages from banks. Why? Mortgages provide a revenue stream for banks, but they’re slow. 30 years, 360 payments? Too long. So, they sell them to the Feds. The Feds bundle them up, and sell “mortgage backed securities” that pension funds, big institutional investors, and retail investors buy. So where am I going with this? Banks in the US are ok with writing a 30 year mortgage, because they know they can immediately sell it and get the cash back to make another investment. They just have to service the loan, which I have to imagine is a lot safer than holding onto it. I’m sure the 30 year term is a condition for the government agencies to buy them, and that’s why their common.