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- Americans are having a hard time affording homes as prices and interest rates have soared.
- A different kind of mortgage could help address the problem.
- Some, including borrowers in the UK, are looking to Dutch-style mortgages.
Soaring interest rates and home prices have made homeownership unattainable for many Americans. While they wait for those figures to come down, a solution to the problem could be found in the Netherlands.
The Dutch offer home mortgages with evolving interest rates that can automatically decrease over time. The thinking is that as the loan gets older and the ratio of the amount owed to the home's value improves — through paying off the loan or any increase in the property's value — the risk associated with the loan decreases. As the strength of the loan improves for the lender, there is less of a need to offset the risks with higher rates.
This particular style of loan could help many Americans, both homeowners who want to move and first-time homebuyers who are concerned about high current and future interest rates.
The obvious benefit to home buyers is that the interest rate on a loan goes down over time without having to pay the costs associated with refinancing, which can be thousands of dollars each time.
And if mortgage interest rates drop, the improved rate could be even better than a refinance, since a buyer with a Dutch-style mortgage would have the compounded benefits of lower rates and a less risky loan.
While this type of mortgage works well in the Netherlands, mortgage systems vary widely across borders. In the US, most mortgages are bought and sold on a secondary market — with lenders and investors buying mortgages and servicing rights — making it tricky to change to individual loans over time. However, other countries are taking notice: The Dutch mortgage lender DMFCO recently began offering Dutch-style mortgages in the UK.
This type of loan would likely bring more buyers to the market, but Lindsey Harn of the Lindsey Harn Group, a real estate firm in San Luis Obispo County, California, believes it could also entice more people to sell their homes.
"I think this would allow more middle-aged sellers to consider selling and giving up their current low-interest rate to buy another house, whether that is bigger or smaller," Harn told Business Insider. "This would be a huge benefit because I think it would give longtime homeowners the confidence to move and not get stuck with a much higher mortgage."
But there are some deeply entrenched features of the American mortgage system that make it unlikely we'll see widespread adoption of Dutch-style mortgages.
The challenges of offering Dutch-style mortgages in the US
A key difference between American and many foreign mortgage markets is that in the US, the vast majority of mortgages are sold into a secondary market. This means individual mortgages are bundled together and bought and sold by investors. This may sound familiar: The buying and selling of bundled risky mortgages was a major factor in the 2008 housing crisis.
In Europe and the UK, mortgages are largely originated, held, and serviced by banks or portfolio lenders.
Dutch-style mortgages can't be sold into the secondary market because they need to be managed by an individual lender who will adjust the rate as the borrower pays off the loan. Mortgage-backed securities investors simply wouldn't want to see a decline in interest rates for the underlying mortgages, as that would mean a lower return on investment. This would make it tricky for Dutch-style mortgages to catch on in the US, said Guy Cecala, the executive chairman of mortgage market data and analytics firm Inside Mortgage Finance.
Additionally, mortgage interest rates in the US aren't determined by the loan-to-value ratio beyond a certain point. For example, a borrower who puts 50% down on a home likely won't get a better rate than if they put 30% down, Cecala said. With Dutch-style mortgages, lenders "would have to be convinced that a 30% to 40% equity mortgage is safer than a 20% equity mortgage," he said.
Melissa Cohn, the regional vice president at the lending firm William Raveis Mortgage, cautioned that the true benefit of a Dutch-style loan would be limited to people who plan to stay in their homes for a long time, something most Americans don't do.
"Most Americans don't stay in their homes for 30 years," Cohn said. "The average home ownership is 6-9 years, and people would not be able to take advantage of the long-term benefits."
American buyers also tend to be impatient and want to refinance their home loans as quickly as possible, Cecala said. The US mortgage industry is built around this behavior: Refinancings make up about 30% to 40% of all mortgage originations, so lenders would likely be reluctant to offer a loan that automatically lowers rates.
But Cecela says he's interested to see what happens with the Dutch-style mortgages newly on offer in the UK.
If they catch on across the pond, "it'll cause other countries, including the USA, to take a look at it."