What’s the difference between mortgages in Australia and the USA?

One of the arguments frequently used to denounce the overseas economists who come here warning that our property markets are going to crash,  is that our real estate markets are different to America.

So what's the difference between mortgages in Australia and the USA?

Aside from different terminology and product types, there are some unique differences and similarities in the US and Australian mortgage markets.

From different borrowing behaviour to credit score systems and product categorization, there are several differences (and some similarities) between the American and Australian mortgage industries.

What are the differences?

From the preference of different mortgage types to credit score systems, mortgage insurance and industry bodies, there are several key contrasts between the American and Australian home loan sector.

1. Fixed-rate preference

One of the biggest differences between the American home loan market and the Australian home loan market is that American borrowers tend to favour mortgages with long-term fixed rates instead of variable rates.

Note: In America, fixed-rate mortgages typically come with longer loan terms of 10,15, 20, 25 or 30 years, whereas the most common fixed terms in Australia are much shorter such as one, two, three, four and five years.

This reflects the difference in borrowing attitudes and behaviour between the two countries.

2. Representation of variable rate

The representation of variable rate loans – referred to as adjustable rate mortgages (ARMs) in the US – is another point of difference.

In the US, ARMs are advertised with the initial fixed period first followed by how often the rate will be adjusted.

For instance, a 5/1 ARM has an initial five-year fixed rate after which the rate is adjusted once a year.

On the other hand, Australian variable rate home loans are simply represented as an annual percentage, such as 3.99% p.a.

3. Credit scores

While credit scoring is an integral part of the home loan application process in both the US and Australia, the systems used are different.

Note: In America, the FICO score is the most common model used, which takes into account your payment history, types of credit and recent enquiries to calculate a three-digit figure from 300 to 850.

As a rule of thumb, a FICO credit score above 740 can secure more competitive rates or lower down payments for a US mortgage.

On the other hand, the system used in Australia is called VedaScore, which ranges from 0 to 1200.

The higher the number, the better.

A credit score between 81 and 100 could secure a better home loan deal.

4. Mortgage insurance

In the US, private mortgage insurance (PMI) is paid for home loans that are greater than 80% loan-to-value (LTV) ratio, which is similar in Australia for full documentation loans.

Note: PMI is generally about 0.3% to 1.15% of the original loan amount and is paid annually, whereas lenders mortgage insurance (LMI) in Australia can either be paid upfront or capitalised into the loan.

PMI in the US is also tax deductible, just like it is for investment loans in Australia.

5. Mortgage product categorisation

The categorisation of mortgage products is different in both the US and Australian industries.

The US mortgage industry features conventional loans that are either conforming or non-conforming. A conforming loan meets the standards imposed by Freddie Mac and Fannie Mae such as maximum loan size and deposit requirements.

Non-conforming loans do not meet the criteria and are therefore not bought by Fannie Mae or Freddie Mac. 

A common non-conforming loan is a jumbo loan, which exceeds the maximum loan size set out by Freddie Mae and Fannie Mac.

This limit is generally $417,000 but can be much higher in certain states.

Non-bank lenders in Australia (which are somewhat similar to US non-conforming lenders) do not have to hold a banking licence, yet they are still bound by the laws and regulations as set out in the Consumer Credit Code by the Australian Securities and Investments Commission (ASIC).

As a result, the regulation of the Australian home loan market is more streamlined.

All Australian lenders have a duty of care to only recommend home loan products that are suitable to the borrower.

The National Consumer Credit Protection Act 2009 (NCCP) stipulates that all lenders follow “responsible lending” obligations, which apply to loan amounts or loan increases.

6. Mortgage point system

Another point of difference between the Australian and American mortgage industries is the “mortgage point” system offered in the US market.

One point refers to 1% of the loan amount.

For instance, 1 point would be worth $3,000 for a $300,000 mortgage.

As a result, US loan products are offered with an interest rate and a point, such as 6% and 2 points.

This allows borrowers to buy discount points at the rate of 1% of the property value, which decreases their interest rate and lowers their repayments.

This system of rate discounting is not available in Australia. Instead, some lenders provide an introductory rate discount for a given time or a special promotional offer.

7. Mortgage experts

The people you will deal with when applying for a home loan are different in the US and Australia (or at least have different titles).

When you apply for a mortgage in America, you will generally deal with the following people:

• Loan officer. Your loan officer will be your first point of contact and the person who will help you find a loan when you approach a lender. Your loan officer will also help you complete your application paperwork.
• Loan processor. Once you’re ready to apply, your loan processor will collect the required documents from you to support your application and will cross-check the calculations for your mortgage.
• Mortgage underwriter. The final say on whether or not you’ll be approved for a loan sits with the underwriter, who will either accept or reject your application.

When you apply for a home loan in Australia, you generally deal with:

• A mortgage broker. If you apply for a home loan in Australia, your first point of contact is likely to be a mortgage broker.
  A licensed broker can help you estimate your borrowing power and compare your home loan options. A broker can also assist you with the application process.
  Effectively, a mortgage broker assumes the role of a loan officer in the US.

• A lending specialist. The lending specialist is a representative from the bank or lender providing you with the home loan.
  They will have the final approval of your application outcome.

What are the similarities?

1. Mortgage rates are negotiable

Although this may not be widely known in either market, mortgage rates are negotiable in both the US and Australia.

If you’ve been a loyal customer and you have a good credit rating, you can easily negotiate your interest rate with your existing lender in order to lower your periodic repayments.

2. Ethical conduct

As in Australia, American mortgage brokers and lenders must provide borrowers with a comparison of different products that are suitable to their borrowing needs.

In America, this is known as a good faith estimate (GFE). In Australia, it is referred to as “responsible lending”, which is enforced by the National Consumer Credit Protection Act 2009 (NCCP).

3. Comparison rate vs. annual percentage rate

Both markets disclose an interest rate that more accurately reflects the cost of the loan.

In the US, this is known as the annual percentage rate (APR).

In Australia, it is called the comparison rate.

Similar to the comparison rate, the APR is an interest rate that includes some of the fees and charges of the loan.

When comparing different home loans, both the APR and comparison rate help borrowers understand the true cost of a loan.

4. First-home buyer assistance

The US government assists first-home buyers through the Federal Housing Administration (FHA), which enables them to get a home loan with a small deposit amount of just 3%-5% in some cases.

Similarly, the Australian government provides monetary grant and stamp duty concessions for first-home buyers to help them get into the property market.

This is implemented through the First Home Owner Grant (FHOG) scheme.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.