It’s insane that Canada doesn’t have true 30 year fixed mortgages. Every 5 years the rates will update and if the payment is too high for you there’s nothing you can do about it. How can you live?
Germany: fixed mortgages are the norm (actually never even heard of another type), common runtimes are 10, 15, and 20 years, and no matter what the runtime is, as the borrower you can simply exit the contract without even giving a reason after 10 years; and that’s not something in the contract, it’s a federal law.
You obviously have to pay back the remaining debt, but this makes it super smooth to either pay off all debt in one go or refinance.
You can refinance earlier, or any time after the 10-year-period, if your contract is 10+ years.
Anything after the 10-year-period comes without any kind of penalty.
Getting out of the contract earlier is possible, but comes with a penalty called Vorfälligkeitsentschädigung — it boils down to the bank demanding the interest payments you would have paid if you‘d stayed in the contract for the whole 10 years.
However, afaik, if you also had an agreement on „Sondertilgungen“, that is, if the contract allows to pay x% of additional down payment every year, the bank must assume you had paid this for the remaining years in the contract.
It doesn’t even seem to make sense from an economic standpoint, leaving the population essentially to gamble and having approx 20% of mortgages coming due each year, threatening the banking sector.
Surely this isn’t that big of a deal for most people? After 5 years you could just refinance the loan and reset it to 30 years again with lower payments.
No mortgages don’t have early payoff penalties. The bank doesn’t really care. They’ve probably sold your mortgage off to be packaged in a bond anyways. They’re mainly in the business of selling loans. There’s a big margin on that. They’re more than happy to payoff your old one and write a new one and collect those fees.
If not, I assume someone would have written a 3/1 ARM with predatory early repayment provisions, so I'm guessing there's probably a conformant mortgage guideline (e.g. from *Mac) that prevents clauses like that.
There's nothing about refinancing that requires your house value to increase.
The concept is that you are taking out a loan to pay off an earlier loan.
If you borrowed at 8% and rates dropped to 2%, you could refinance even if your house price dropped, and it would still make sense, as you borrowed what you borrowed, and still owe it.
Now, if you are trying to refinance and take some money out from equity, sure, that relies on having greater equity than the loan value.
I think the exception to this is if you're underwater on your mortgage. Then the new bank won't give you a new loan against the house for more than its worth.
This is of course stupid on the part of everyone involved
but especially the person who currently owns your loan. Lowering the interest rate for a person with an underwater mortgage can only increase the security of it as a financial asset. If they default it's pure loss. But a new bank doesn't want to take on an underwater mortgage and even at the institution that owns your loan the left hand originating mortgages doesn't know what the right hand is doing servicing them.
so whoever lent you at 8% would take a loss if you could just abandon that rate and went with someone else's 2% rate. Therefore, it can't be this simple - somebody must be eating a loss. I suspect that 'somebody' is Freddie Mac and Fannie Mae , which is a quasi-gov't corporation and therefore, they might be able to take the loss without worrying about profitability.
Why would they? If I lend you $100 at 8% interest and for simplicity let's say it's an interest only loan so you only pay the interest I get $8/yr for my trouble. Then you refinance with someone else at 2% and I get my $100 back. All good, now it's available to me to loan back out. The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect.
> The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect.
but this is a real loss, since the original loan contract was for 8% p/a for X years.
In a different country like australia, a fixed term loan cannot be paid off without the expected interest. This is why i am confused as to what makes refinancing work - who eats the loss?
Its not a loss, its an unrealized gain. What happens is they just don't get to have it, but they still get their principle returned as well as any interest up that point -- i.e. they made still made a profit.
I also live in a country without full-term fixed mortgages, however we also don’t have a secondary market for mortgages. AFAIK these two things are at the very least not entirely orthogonal, and to be blunt I don’t think anyone is looking to the US as a source of inspiration for that aspect of your mortgage system.
