How Australian Mortgages Compare to the US, Japan and South Korea
- Australian mortgage holders do the heavy lifting of trying to beat inflation as interest rates sit at a 15-year high, while homeowners in countries like the United States,...
- Andrew Clifford shifted his mortgage from a variable rate to a fixed rate for the next two years in March as interest rates started to climb.
- I'm relieved I locked it in … [but] it's only the people with mortgages that are doing the heavy lifting of trying to beat inflation.
Australian mortgage holders do the heavy lifting of trying to beat inflation as interest rates sit at a 15-year high, while homeowners in countries like the United States, Japan, and South Korea access longer-term fixed or alternative loan structures, abc.net.au reported.
Andrew Clifford Locks In Rate as Reserve Bank of Australia Raises Cash Rate
Andrew Clifford shifted his mortgage from a variable rate to a fixed rate for the next two years in March as interest rates started to climb. That decision came well before the Reserve Bank of Australia (RBA) lifted the cash rate to 4.6 per cent.
I’m relieved I locked it in … [but] it’s only the people with mortgages that are doing the heavy lifting of trying to beat inflation.
Andrew Clifford
Mr Clifford added that if he could access a 25-year fixed-rate home loan like borrowers use in the US, he would choose it immediately. Under a fixed-rate mortgage, lenders charge the same interest rate for the life of the loan, whereas variable-rate lenders can change rates over time.
Most Australians carry variable-rate mortgages. RBA figures show that less than 5 per cent of Australian mortgage holders use a fixed rate.
How Global Mortgage Markets in the US, Japan, and South Korea Differ
Research indicates that borrowers in Australia would benefit from long-term fixed home loans similar to those found in the US, South Korea, and the European Union, where fixed-rate mortgages span anywhere from 10 to 50 years. In the US, government-sponsored entities such as Fannie Mae and Freddie Mac guarantee approximately 70 per cent of mortgages.
University of NSW economist Richard Holden noted that Australian lenders have no structural barrier preventing them from offering 30-year fixed-rate mortgages. Such products could save borrowers thousands of dollars in interest each year.
They were founded with the idea home ownership was an important kind of social concept. And giving borrowers certainty about their future mortgage repayments. There are pros and cons but we don’t have anything like that in Australia.
Richard Holden
However, Professor Holden pointed out that a long-term fixed model prevents borrowers from benefiting when interest rates fall, pointing to the period between 2015 and 2021 when rates plummeted.
Different structures prevail in Asia. University of Sydney's Doowon Lee explained that most Japanese mortgages feature variable rates for 35 years, a reflection of Japan experiencing near-zero interest rates for the last 30 years.
In South Korea, most mortgages are also variable, but the gap between fixed and variable rates is narrower. Dr Lee attributed this smaller spread to investor demand being shaped by jeonse, a rental arrangement where tenants pay 50 to 70 per cent of a property’s value upfront as a two-year lease deposit. Landlords gain access to large pools of interest-free funds to invest or hold in high-interest accounts, while tenants use the two-year window to save for their own home purchases.
Government Intervention Required to Reshape Australian Lending
Restructuring Australia’s mortgage market into a 30-year fixed system akin to the US would require sweeping changes across the entire financial sector. Professor Holden stated that if the Australian government issued more 30-year debt, it would signal lower risk to mortgage lenders.
Government scaffolding would be necessary to push Australian banks toward offering long-term fixed products, according to Professor Holden.
Over the past decade, South Korea’s government has pursued a target to increase the proportion of borrowers on fixed rates, introducing fixed terms extending up to 35 years. Dr Lee stated that South Korea aims to have at least one-third of all mortgages on fixed rates by the end of 2026. South Korean capital gains tax policies, which tax property sales within one year at close to 70 per cent and sales within two years at nearly 60 per cent, also dampen investor flipping and encourage longer-term borrowing buckets.
Victorian Mortgage Stress Services Close Books as Demand Doubles
Meanwhile, financial pressure continues to mount for Australian homeowners dealing with current interest rates. A free Victorian service that assists homeowners facing mortgage stress has been forced to temporarily close its books after receiving double the usual volume of calls for assistance.