Key Takeaways
- Fixed-rate mortgages have shielded U.S. homeowners from the Federal Reserve's campaign of anti-inflation interest rate hikes.
- Central bank rate hikes in other countries including Australia and the U.K. hit household budgets harder and faster because variable-rate mortgages are standard.
- The U.S. is the only country where a 30-year fixed rate mortgage is standard, and is the result of government policy to encourage home ownership.
If you’re one of the vast majority of U.S. homeowners who has a fixed-rate mortgage, be thankful you don’t live in Australia or Great Britain.
Homeowners in the U.S., as a whole, are feeling far less financial pain than their counterparts in other countries, according to an analysis released Monday by economists at Goldman Sachs. That’s because of the popularity of the 30-year fixed-rate mortgage in the U.S., which protects the vast majority of homeowners from rising mortgage rates.
Just like in the U.S., central banks in Australia, Britain, Canada, France, Italy and other countries are raising their benchmark interest rates—pushing up rates for mortgages and other consumer loans—in an effort to slow the economy and subdue rapid inflation.
In the U.S., rate hikes have caused mortgage rates to shoot up from an all-time low of 2.65% in January 2021 to 7.79% as of last week, crushing homebuying affordability. But no other country has the 30-year fixed rate mortgage as standard like in the U.S., so those rate hikes hit household budgets faster and harder.
For example, in Australia, where variable-rate mortgages are the norm, mortgage payments ate up more than 7% of households’ disposable income in 2023, up from around 5% in 2019.
In the U.S., by contrast, the share barely budged, remaining around 3% just like it was before the pandemic. That number is only projected to rise slightly as more homeowners get loans at today’s new, higher rates, according to the analysis of Goldman chief economist Jan Hatzius together with other economists at the investment bank.
The U.K., where five-year fixed rates are the norm, was somewhere in between those two extremes.
The financial hit from higher mortgage rates also varied depending on levels of mortgage debt in each country, as well as real estate prices and a few other factors. However, the data showed how much the finances of U.S. households are shaped by the 30-year fixed rate mortgage.
The U.S. is the only country in the world where the 30-year fixed rate mortgage is the most popular way that people buy houses. It’s the deliberate result of government policy—government-sponsored enterprises Fannie Mae and Freddie Mac buy mortgages from lenders, ensuring that they continue to offer such loans at little risk to themselves.
This tradition does have its critics. After all, the system nearly collapsed in the great financial crisis of 2008, and was only salvaged by a taxpayer-funded bailout of Fannie and Freddie. Still, Goldman Sachs’s analysis shows why it’s so popular. By locking in a mortgage payment for decades, homeowners can protect themselves, to an extent, from the ups and downs of the economy.
