Why High Mortgage Rates Matter Less In The U.S. Than In Other Countries

If you are in the US If you are in the U.S. You’re one of the majority of homeowners in the U.S. who have a fixed-rate mortgage, so be thankful you don’t live in Australia or Great Britain.

Homeowners across the U.S. are feeling much less financial pain than their counterparts in other countries, according to an analysis released Monday by Goldman Sachs economists. This is due to the popularity of the 30-year fixed rate mortgage in the US, which protects most homeowners from rising mortgage rates.

Like the US, central banks in Australia, Britain, Canada, France, Italy and other countries are raising their benchmark interest rates – rates for mortgages and other consumer loans – in an effort to slow the economy and reduce rapidly rising inflation. Are. Are increasing.

In the US, mortgage rates have risen from an all-time low of 2.65% in January 2021 to 7.79% last week as rates have risen, reducing home affordability.
But no other country has the 30-year fixed-rate mortgage as standard as the US, so raising those rates becomes increasingly difficult for household budgets.

For example, in Australia, where variable rate mortgages are the norm, mortgage payments will eat up more than 7% of households’ disposable income in 2023, up from about 5% in 2019.

In contrast, in the US, the share barely grew and stood at around 3%, the same level as before the pandemic. That number is projected to increase only slightly as more homeowners get loans at today’s new, higher rates, according to an analysis by Jan Hatzius, Goldman’s chief economist, along with other economists at the investment bank.

The U.K., where five-year fixed rates are the norm, was somewhere between those two extremes.

The financial impact from higher mortgage rates also varies depending on the level of mortgage debt in each country, as well as real estate prices and some other factors. However, data shows just how much the financial situation of American households is affected by the 30-year fixed rate mortgage.

The US is the only country in the world where a 30-year fixed rate mortgage is the most popular way for people to buy a home. This is the result of a deliberate government policy – government-sponsored enterprises Fannie Mae and Freddie Mac buy mortgages from lenders, ensuring that they themselves continue to make such loans at low risk.

This tradition has its critics. After all, the system nearly collapsed in the great financial crisis of 2008, and was only saved by taxpayer-funded bailouts of Fannie and Freddie. Still, analysis from Goldman Sachs shows why it is so popular. By deferring mortgage payments for decades, homeowners can protect themselves from the ups and downs of the economy to some extent.

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