Mortgage models, interest rate risk, and the consumer: A four country comparison

This paper examines the characteristics of the typical fixed-rate mortgage product in four countries and the concomitant interest rate risks and costs that they imply for the consumer. In each instance the funding, and therefore the potential duration mis-match, is handled in a different fashion. The role of the national government also varies with regard to interest rate regulation, interest rate risk management, and the management of mortgagor default risk. The benefits and drawbacks of the various systems from the home owner's perspective are examined. The US system is the only one that allows a home owner to fix their mortgage interest rate for a long term and allows the borrower to refinance with no notice, no pre-payment penalty, and at any time for any reason. Moreover, the US has the least government interference and one of the highest home ownership rates in the world at one of the lowest costs for the consumer. The countries considered are Denmark, Canada, the US, and the Netherlands.