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Comment by pfarnsworth | Hacker News Reader

The situation is actually even worse than this.

In Canada, they don't have fixed 30-year mortgages like in the US. They have 25-year mortgages with 5 year terms. They need to refinance within 5 years. If they take a 20-30% hit in the house costs, they will absolutely be unable to renew their mortgage, unless they come up with the cash to make up the difference in appraised value.

This will lead to a lot of forced selling or foreclosures which will only pull the house prices down further, and cause more forced selling.

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That is extremely bad deal if you have to essentially re-apply for the mortgage every 5 years. I then wonder why nobody offers much better fixed 30yr there? Regulations?

30 year fixed mortgages are offered almost exclusively in the USA. They would not exist here if not for the massive government subsidies in the form of backing & tax breaks.

That's correct. The 30 year mortgage wouldn't exist if it's weren't for the gov't coming in and backing them.

Before the Great Depression, mortgages were completely private – homeowners would generally string refinances one after another, and mortgage terms were less than 5 years. It wasn’t until 1934 that the Federal Housing Administration stepped in with an insurance program on mortgages, an amortization plan, and terms of 15-20 years (much like today, many mortgages are insured based on standardized programs – say, 30 years, fixed interest, 80% loan to value).

[1]https://dqydj.com/history-30-year-mortgage-private-mortgage-...

Maybe we aren't talking about the same thing, but most mortgages in Australia are 30 year, variable rate with a honeymoon period but no reapplication required throughout the loan.

My understanding is that is pretty similar to the US, but it sounds different to Canada.

We don't have the same tax breaks as in the US though.

In the US, you can get a 30 year fixed mortgage. Basically you set your interest rate when you take our the loan and it's doesn't change for 30 years.

It's really quite amazing if you think about it.

I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free.

If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.

If your 30-year mortgage is at 5% and you refinance it at 25 years at 3%, who pays the loss the bank takes due to the new, lower interest rate?

The bank. If interest rates go up a few points in the coming years, and it would be hard for them not to, banks are going to be sitting on a ton of mortgages that are not profitable.

That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.

Ok, so in effect it's these quasi governmental corporations that assume the risk of rates going up (which would make it very lucrative to refinance), and that's where the subsidy lies.

We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.

The banks mitigate the loss from early payment by heavily front-loading the interest - i.e. first years huge part of what you're paying is interest, and very little goes to equity (at least in default fixed payment scheme, you can pre-pay the principal if you want, but on top of the default fixed payments). The longer is the life of the loan, the more goes to equity and the less to interest. So if you close off the mortgage early, you've already paid a lot of interest that bank would have gotten. Of course, not all of it, but the bank also gets the money back earlier, so I don't think they lose too much.

A "refinance" means someone (which may be your original bank or someone else) lends you the balance to pay off your old loan, and you pay the new loan.

There's not really a loss, since the terms of your old loan allowed the early repayment.

The bank doesn't "lose" in that they are fully paid up to the date of the refinance.

The bank loses in that they are upside down on the spread. They have a mortgage which is paying a low interest rate but they have to borrow at a high one.

The mortgage is essentially a 30 year option, in those terms it becomes obvious why 30 year fixed mortgages wouldn't exist in an unsubsidized market.

You have to take into account all time periods from the time the interest rate charges started (beginning of loan) through to the time when the bank's loan is terminated.

They may have (potentially) had a few month's worth of being underwater but they were able to borrow at a lower rate also.

Further, there are several %age points of spread between what banks pay to borrow and what the mortgage rate is, further cushioning them. See the CIDOR here: http://www.tradingeconomics.com/canada/interbank-rate ... now compare with the mortgage rates a bank will charge.

EDIT: CIDOR under 1% but ratehub.ca says the best 5-year fixed rate you can get is... 2.42% .

That's what low rates are designed to do: make the credit cycle work faster, right?

Understood, and makes sense. But even variable rate mortgages in US do not require maintaining equity threshold, do they? Maybe also consequence of govt guarantee. Though I wonder what Canadian central bank would do if it finds itself in the same situation of mass mortgage defaults/underwater mortgages as happened in US - I suspect they would also opt for one or another form of bailout, thus implementing implied, if not explicit, guarantee.

Tax breaks of course is another thing that massively influences US mortgages. I probably would never take my current mortgage if not the interest tax break.

what rates of those fixed mortgages do these subsidies provide on average?

To me, massive government subsidies is more like in France where you can have a 0% interest 25 year mortgage if your household income is low enough.

Or the special account which gives a 2.6% fixed interest after having saved some money in a special savings account.

Freddie & Fannie own ~45% of the mortgages in the US. Ginnie has another 15.

In addition VA loans & FHA loan security is applied to something like 45% of loans. I've seen estimates that suggest the US taxpayer backs or owns 60% of loans in the residential market.

What are 25-year mortgages with 5 year terms?

Do you mean the interest rate is fixed for only five years? If so, people will not need to refinance as long as interest rates stay low.

It means the mortgage is based on a 25 year repayment schedule, but the money is only lent for 5 years at a time. After the 5 years are up, you need to pay back all the remaining principle. That's usually done by taking out a new 5 year mortgage.

Wow, that's utterly terrifying.

It's how it's been done in Canada for the last century. Normally interest rates don't change that drastically and if they do go up it's due to inflation which is usually reflected in a salary increase.

What would be really terrifying would be another period of stagflation (no growth, high inflation). You could see your salary stay the same, but your mortgage payments increase by 20-40% when you refinance.

Can they deny an existing homeowner a mortgage? In the US, getting a mortgage is often a convoluted process that takes weeks of effort to put together and can fall apart at any time.

Yes, it is possible, but more often the homeowner switches lenders themselves, since they are now able to negotiate for a better rate from a competitor.

The truly terrifying thing is that the banks have been adding clauses to the mortgages that on renewal if the market value drops below the outstanding balance, the homeowner is required to pay the difference in order to renew.

This is scary because they will not have paid off much in the first 5 years, but the house price can certainly drop a lot in 5 years in a down market, and there would be very little hope for finding a new lender willing to offer a new mortgage for more than the market value of the house.

Getting a mortgage in Canada is (in my experience) a very weird process for an agreement over such a large sum, but typically can happen within a week.

Wow, that's basically a 5-year loan. I'm surprised that Canadian home buyers accept such risk. I wonder why the mortgage market in Australia and UK is so different to Canada.

I think it means amortized over 25 years, balance due and payable in 5, meaning you make payments like it was a 25 year mortgage, but after 5 have to pay it off (often, as GP points out, by refinancing.)

the interest rate is fixed for 3-5 years usually, yes

even if interest rates are flat (or go down, even) you can still be forced into foreclosure if your equity in the home drops below an acceptable threshold

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