How Do American Mortgages Work? Part 10: How does Western European Mortgages Compare

Relating this series to the Western European mortgage market, as fixed-rate mortgages are most common among America while variable-rate mortgages are the most common in Western Europe. This is because Fannie Mae and Freddie Mac insure their mortgages. This means it does not affect the lenders if the interest rate rises on a fixed-rate mortgage. It is so, because the mortgage market in the United States relies more on the secondary mortgage market than on formal government guarantees. Comparing home ownership rates between the United States and Western Europe, they are fairly similar but higher default rate in the United States. Mortgage loans are mostly non-recourse debt where the borrower is not personally liable in the United States.

With Ireland’s typical interest rate being higher compared to other Western European countries, theorist claim it was from the popularity of Tracker mortgages. Tracker mortgages being locked in at 1% higher than the European Central Bank (ECB) Rate, when the ECB rate hit 0% lenders were contractually obligated to have the borrowers’ interest rate at 1%. Since the lenders need to make up the money lost from Trackers, they raised the interest rates for the Standard Variable Rate mortgages (which the bank determines the interest rate). This is the claim to why the Ireland’s interest rate is relatively higher than other countries throughout the EU.

The secondary mortgage market in Ireland is not as massive as the United States but it is growing. If banks need to remove some loans off their balance sheets, a mortgage-backed security is a good option for them especially non-performing loans.

Even though mortgage markets can be quite complex, they serve an important purpose: to allow a family to continuously build their wealth in a home rather than paying rent with money they will never see again.

Are tracker mortgages haunting Ireland’s mortgage market?

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