The Case Against 30-Year Mortgages

This isn't about 30-year mortgages in the general case, this is about the US specifically, where a fixed-rate 30-year mortgage is typical, with a good rate and no early repayment penalty.

And yes it's insane, because if rates go up you leave it alone and if rates go down you remortgage at a lower rate.

Why is that insane? It’s good for the consumer, no?

Not all consumers are homeowners. Something that is only good for one portion of the public is usually paid for by the other portion.

that's how all bonds/loans work

It's insane because why would you offer such a product? You're giving the customer a free bet on interest rates.

It's not how bonds work because you can't pay off a bond early other than by buying it on the open market at the prevailing price.

And furthermore, not all loans are fixed-rate. UK mortgage rates are relative to the Bank of England base rate.

Because the government is interested in subsidizing residential property ownership.

Why would healthcare be free? Who would offer such a product? Because some governments are interested in subsidizing such things.

Some variable rate mortgages in the UK are. You can also get fixed rate.

Free bet? You have to pay to refinance.

At the end of the day, they make money on the interest. Supply meets demand.

> the government is interested in subsidizing residential property ownership.

As an aside: that doesn't work, it just makes houses more expensive.

Thanks, I didn't know that.

Plenty of places don't have 30 year mortgages, variable rates might even be standard there and real-estate is still unaffordable. Until Covid housing was actually quite cheap in the US relative to income compared to many other Western countries. It still relatively is, just compare major US and Canadian cities, the gap is huge.

Fixed-rate mortgages are offered in the UK, but they are only fixed at a good rate for a short period of time (maybe 2-5 years) before they go up to an unreasonable rate, which would force you to renegotiate the mortgage to get the new prevailing rate at that time.

So it's effectively a variable rate anyway.

Well, a series of shorter term fixed rates. Which I guess makes it variable over the entire lifetime of the mortgage, but a bit more predictable than a true variable rate.

You can get 10 year fixes, but they are of course more expensive than shorter term fixes.

Not a whole lot. Also, if you have a generous enough mortgage agent they will assume the cost of the refi. I’ve done at least 2 refi’s in the past at $0.

A lender never (intentionally) gives anyone anything for "free". This is why ARMs often have lower interest rates than fixed 30 year mortgages - the risk to the lender from rising interest rates is lower with ARMs so lenders generally accept a lower interest rate on ARMs.

Both sides are making a bet on future interest rates and alternative investment returns - with one (the borrower) paying extra for an "opt out early" option for which the lender assumes the risk.

It's a bit like the borrower is buying a long term put or call option from the lender which the borrower is free to exercise at any time or to let expire but the lender can't get out of (they, of course, can always sell the mortgage - but perhaps at a loss in some economic climates due to past and expected future interest rate declines and/or changes in default risk due, for example, to a recession or depression).

>you can't pay off a bond early

Only assuming it doesn't have a call provision.