The difference being that with a fixed rate loan, the rate is usually only fixed for a set number of years (commonly 3-5) rather than for the life of the loan as Throatwarbler Mangrove said is usual in the USA. After that it would convert to variable unless you renegotiated it.
That’s called a hybrid mortgage here (fixed for an initial period of a set length, then adjusts from that point on) and they’re becoming increasingly common.
the other big difference being that Australian banks are much more heavily regulated and “sub-prime” loans do not exist.
Last month, the Council of Mortgage Lenders stated that the average deposit made by first-time buyers in the UK had risen to 18%. This is the highest level in 35 years.
From about 1983 until the beginning of 2008, it was possible to buy a house with no deposit whatsoever i.e. lenders were offering 100% mortgages. In fact, until early last year, some banks and building societies were offering 125% mortgages. Such an arrangement comprised a 100% mortgage plus an unsecured loan for the rest of the money. Lenders felt secure in advertising these deals because of rising house prices, the market topping out in August, 2007.
The average mortgage life is still about 25 years, although many borrowers change lenders several times during this period in order to take advantage of more favourable rates of interest.
I believe it’s the same in the US; if the mortgagee can sell the house for more than what’s owed to them, the balance goes to the borrower. It’s possible that the mortgagee can withhold certain expenses. Of course, the mortgagee has more incentive to sell the house quickly than to sell it for more than the principal.
If the homeowner is paying attention and he’s not upside down on the mortgage, it’s to his advantage to sell and pay off the loan rather than let the mortgagee proceed to foreclosure, which damages the borrowers credit rating. The big problem now is that payments have gone up (because of adjustable mortgages) or incomes have reduced at the same time as home values have declined far below the principal.
As Kal says the key difference between foreclosure and repossession is that in the latter the homeowner has the right to any surplus left over from the sale of the property, whereas with foreclosure, ownership vests absolutely in the mortgagee and the homeowner is left with nothing. In Ireland foreclosure is, as a matter of practice, never allowed any more (in fact there’s legislation going through parliament at the moment which will abolish it) but repossession can still be used.
I was told recently that foreclosure carries some advantages to the homeowner in the US i.e. allowing you to escape all your other debts - can someone confirm that?
That is incorrect. Foreclosure only deals with the underlying real estate to which the mortgage (or Deed of Trust in some states) is subject.
The person that told you that may well have been thinking of bankruptcy.
Bullshit.
You have totally ignored the early 1990s recession when house prices took a dip, resulting in more cautious lending by mortgage companies during this period.
If it was BBC world rather than the UK BBC it could be that the BBC was explaining it to an international audience hence the need to explain the mortgage process. The BBC has a pretty wide global audience and outside of the OECD countries mortgages are not nearly as popular or possible as within the OECD.
From my experience in South America and Asia (non OECD) people generally pay cash or pay as the house is built.
NBC
For my house in Spain I’ve got a 20y mortgage from my bank, put 20% down. Interest varies yearly; the calculations are done “French style” which is very different from the way American loans are calculated. A loan from a property agent would require less money down but carry higher interests and penalties.
In the US system, all interest is calculated at the beginning and considered part of your debt. First you pay your interest, then you finally start paying off the principal. The penalties for early cancellation (complete or partial) can be outrageous.
In the French system, interest is calculated and recalculated as the interest changes or due to sudden variations in the principal (partial cancellations). The interest is not considered part of the debt until payment dates come up. Every single payment has a part that goes to principal and a part that goes to interest. When I perform a partial cancellation I can choose whether to continue paying the same amount but shorten the time, or keep the time but make the payments lower. My penalty is zero for partial cancellation, 0.1% for total cancellation.
If I borrowed $100, 4% interest to be paid on a single payment a year after the debt is contracted, using the American system, and I paid early, I’d have to pay $104 plus whatever the penalty was.
If I did the same on the French system, I’d have to pay $100 plus the penalty: the interest wouldn’t be part of my debt until the pay-up date arrived.
:dubious: Didn’t check with yourself before posting, huh?
Thanks, Seeker. Boy, that was confusing the hell out of me.
This is also what was mentioned a lot in the dutch media, the fact that you just could walk away from your house and your mortage is satisfied. This in combination with the easy lending of money.
They most certainly exist. Just not to the same extent as in the US.
My American mortgage calculates the interest each month, based on the principal owed at the beginning of each month. Each payment is broken up into principal and interest.The first payments put very little toward the principal, but that small principal payment lowers the interest owed the next month, and consequently increase the amount of the next month’s payment which is allocated to principal. If I pay extra toward the principal, my term stays the same, and my required payment stays the same but the next payment will put more towards the principal than scheduled, resulting in a lower total interest payment. My mortgage has no prepayment penalty. Some mortgages do, but it’s instead of the interest which would be owed if the loan were paid off on schedule, and a much smaller amount. It wouldn’t be $104 plus the penalty, it would be $100 plus the actual interest owed until the date of the payment plus a penalty.
Japanese homes tend to be more expensive, so 35-year loans are not uncommon.
During the Japanese bubble in the late 80s, banks would loan 100% of the house. After they got burned in the crash that doesn’t happen anymore, but the down payment requirements aren’t that big.
My American mortgage works the same way here. There’s no prepayment penalty, so any extra payment that is made goes directly into reducing the principal. The regular monthly payment goes into both the principal and interest, with the interest being re-calculated every month based on the principal remaining.
I bought my house in the UK with 100% mortgage in 1994.
Not on my mortgage either, or any US mortgage I’ve ever heard of. Interest is calculated each month on the remaining principal. You may be confused because with a rate that’s fixed for the life of the loan, it’s possible to calculate a full amortization table ahead of time, and show exactly what the interest will be over the life of the loan, and the full amount of interest paid if the loan is repaid over the entire term, but that doesn’t mean the full amount of interest is immediately due on the day you buy the house. If that were the case, it would be pretty much impossible to sell your home before it’s paid off, which obviously isn’t true.
ETA: Never heard of prepayment penalties on a mortgage either. No doubt they exist on some super shady sub-prime disasters, but they certainly aren’t part of a normal mortgage. When you sell your house, you give the lender the date the sale will go through, and they calculate exactly what the interest+principal will be on that day to zero out the loan.