This morning I read one of the headlines on a popular financial account that I follow on twitter. It said this:
Around 1.4 million Britons could lose a fifth of their disposable income if mortgage rates stay at current levels according to the Institute for Fiscal Studies.
The reason this jumped out at me is because I have been following and researching the housing market for close to two decades, but recently I learned that the 30 year fixed rate mortgage and the 15 year fixed rate mortgage is a product that is uniquely an American concept.
Matter of fact when you research other countries that have a similar product sometimes you will see Denmark of all places had one or has one. But it really is something that is unique in the United States.
This is really a humongous advantage to Americans. Knowing what your housing costs are going to be for the next 15-30 years, without question is something that has really helped create a middle class and has allowed people to become wealthy from owning real estate. And it makes me even more bullish on continuing to help people and myself invest in real estate.
As a home owner the 15 and 30 year fixed rate mortgage is amazing, but as an investor I would say it is even more so.
So where did the 15 and 30 year fixed rate mortgage come from and why do we have it here in the states.
After the great depression in 1934 President Roosevelt created FHA (Federal Housing Administration). Because banks were hesitant to lend this was preventing the economy from growing. So the FHA solved this by protecting lenders and substantially reducing the risk of a borrower defaulting on their loan.
To achieve this, they created the 30 year mortgage. They created the appraisal system that helped lenders assess risk. So loans that met the FHA guidelines were federally insured. So banks were protected. When banks can lend the economy flourishes, this created the economic growth we saw after the great depression.
Part of this new process the FHA also created quality standards, lowered downpayment requirements, created the 15 and 30 year loans and amortization periods. Ultimately Freddie Mac and Fannie Mae were created and after the Great Financial Crisis in 2008, both of these organizations were put into receivership of the United States government. Which means they are supported and managed by the government.
This set up we currently have is unique to the United States. The housing market, which means the mortgage industry is primarily made up of private organizations conducting business, but it is financed by the American government basically. Anytime you attempt to get a mortgage that qualifies. It means it must be approved by the guidelines written by Fannie Mae and Freddie Mac which is basically the government.
So you see how and why the 15 and 30 year fixed rate mortgage was created.
But how unqiue is it compared to other countries?
See below:
Most other countries have short term mortgages, which means any adjustment in interest rates the people in these countries who have a short term 3-5 years or any many cases a mid term loan like 7-10 years, will have their housing costs adjust. With the current interest rate market millions of people across the world will be experiencing significant changes to their monthly budgets as their housing costs will not be more expensive.
Which brings me back to the statement I read this morning where 1.4 Britons are susceptible of losing a fifth of their disposable income. Because when their short term loans adjust with the new rate, they will be paying a lot more than they have been paying for their housing costs.
Long term fixed rate debt provides people stability. Housing is one of the largest expenses on a monthly basis in most peoples budget. So knowing how much your housing will cost you on a monthly basis provides stability.
Also, having this debt fixed for such a long period of time, people who pay their loans off sooner eliminate their largest monthly expense which allows them to do other things with this money, such as invest. This provides Americans a great advantage in creating and building wealth.
As an investor, we also get the benefit of using the 15 and 30 year fixed rate mortgage.
I am often critical of the government and the things they do and have done. However, I think it is clear to see how the 15 and 30 year fixed rate mortgage has helped millions and millions of Americans have a stable home, build wealth and create opportunity for themselves and their family.
To your success and your future.
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