The history of home loans
Mortgages through the years
The standard 30-year mortgage is taken as a fact of life in many places in the world. It’s hard to imagine a time before it existed. But mortgages used to look very different to the products we’re used to today, and the birth of the 30-year mortgage is a relatively recent event. So how did mortgages come to be, and how long have they been around?
Mortgages in the Middle Ages
Mortgages have been around in some form since at least the 12th Century. The word “mortgage” has its roots in Latin and means “dead pledge”. This is because of the idea that the property involved in a mortgage was forfeit, or dead, if the loan was not repaid. Conversely, the pledge itself was dead, or fulfilled, once it was repaid.
Mortgages in the Middle Ages looked very different. A borrower would be given the right to live on the land owned by the lender, with the entire principal of the loan to be repaid in a lump sum at the end of the term (which was generally only a few years). The lender retained the title to the property, which would either pass onto the borrower after the loan had been repaid or remain with the lender if the borrower was unable to pay.
Because charging interest was considered usury (an unethical monetary loan), which was expressly forbidden by Christian doctrine, lenders instead charged rent or took a percentage of the revenue produced by the land.
Mortgages in this era heavily favoured the lender, and often resulted in borrowers often being evicted from the property at the end of the loan term, with little or nothing to show for their toil.
This changed in the 17th Century with the introduction of the idea of equity of redemption. This meant that borrowers had a right to redeem the land on which they had entered into a mortgage by paying the amount owing, even if they had reached the end of the loan term. Courts during the time dictated that borrowers would be given a “reasonable time” to pay the amount owing, and, should the property be foreclosed upon, a right to any proceeds of the sale of the land over and above the amount they owed.
Mortgages in early 20th Century
By the late 1800s and early 1900s, mortgages had begun to become more common and more standardised. However, banks were not the institutions that offered mortgages. Instead, it was insurance companies that primarily operated in the mortgage market.
Mortgages in this time period required borrowers to pay a significant amount of the principal upfront, typically 50% or more. They were also offered only for short terms of around five years. Regular principal payments were not a feature, and borrowers instead were expected to make payments only on the interest during the loan term, followed by a balloon payment on the entire remaining principal at the end of the loan term. Not surprisingly, defaults were relatively common.
The birth of the modern mortgage
We have the Great Depression to thank for the birth of the 30-year home loan we know today. During the Depression, US President Franklin Roosevelt’s New Deal program introduced new regulations for the banking and finance sector. Among these was the creation of the Federal Housing Administration (FHA).
The FHA insured mortgages, and regulated terms and interest rates on the mortgages it insured. It instituted 30-year terms for mortgages, and offered higher loan to value ratios (LVRs). The government backing of mortgages meant banks were more willing to carry long term debt on their balance sheets. The FHA also created the idea of amortisation, or paying off the principal of a loan over time. This meant that borrowers didn’t face large balloon payments. The more manageable regular payments made borrowers less likely to default.
From here, the idea of the 30-year mortgage spread around the globe. In 1965, the Australian government established the Housing Loans Insurance Corporation, which insured lenders against default, much like the FHA. As it had in the United States, this made lenders in Australia more willing to carry long-term debt on their balance sheets, and offer higher LVRs.
The 1960s also saw the rise of non-bank lenders in Australia. During the Depression, the Australian government introduced regulations that capped the amount of loans banks could write, dictated the capital they had to hold and set interest rates. Unregulated non-bank lenders were able to enter the market offering more competitive interest rates and lending to a wider array of borrowers.
It was non-bank lenders that introduced many of the features common to home loans today, such as interest-only payments, access to equity and lending to self-employed borrowers. Throughout the 1980s and 1990s, non-bank lenders continued to introduce innovations to the Australian home loan-market that today are common features offered by banks and non-banks alike. It was this era which also saw the rise of mortgage broking.
The future of home loans
Home loans in Australia are continuing to evolve. As the market becomes more competitive and interest rates remain low, lenders must offer new innovations to entice borrowers. Lenders are now are turning to technology to offer features which allow borrowers to complete most of the home-loan process online.
As has happened throughout the history of mortgages, new entrants to the market introduce new innovations. Already, peer-to-peer and crowdsourced lenders are offering new ways to access the property market. Fractional property investment platforms are allowing consumers to buy into a share of a property without a high upfront cost.
The future of the mortgage market may look very different. Mortgages in the years ahead may look as foreign to us as today’s 30-year home loan would to landowners in the Middle Ages. In spite of the evolving nature of the mortgage as a product, however, the end goal remains the same: allowing everyday people to achieve home ownership.
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