Would you like to take out a home loan where the bank can’t change the interest rate for 30 years? Americans can lock in their mortgage rates for decades, but that’s not necessarily as good as it sounds.

When the Great Depression hit nearly a century ago, the US started pivoting away from variable rate home loans towards fixed rate loans. Variable rates can change based on market interest rates, whereas fixed rates remain the same over the life of the loan. The president at the time, Franklin D. Roosevelt, wanted to make homeownership more affordable.

Americans can lock in their mortgage rates for decades.Credit: Louise Kennerley

Today, variable rate mortgages are a rare sight in the US, accounting for less than 5 per cent of home loans. By contrast, roughly 70 per cent of mortgages in Australia are variable rate loans, coming second in proportion only to Norway.

How did this happen? And do US households and their economy have it better?

As part of the New Deal in the 1930s, Roosevelt launched the Home Owners’ Loan Corporation to buy and convert failing mortgages into longer-term loans, and a Federal Housing Administration (FHA) to insure home loans against default and set new lending standards. These things helped bring about the 15-year mortgage, which the FHA gradually pushed out to 30 years.

Predictable payments over a longer period made homeownership more affordable for buyers, but a fixed rate over 30 years didn’t make much sense for the banks. That’s because banks needed to fund themselves, too, borrowing at interest rates which were not fixed. If their own borrowing costs increased, while their customers’ interest rates stayed the same, it would risk the banks losing money.

So, in the 1970s, the US Congress gave the green light for government-sponsored enterprises Fannie Mae and Freddie Mac to buy mortgages from lenders, shifting the risk off the banks’ books. This made 30-year fixed loans more attractive for lenders as well as home buyers.

It was around the 1980s that Australian financial institutions began offering fixed-rate loans. But they never really ended up taking off. That’s partly because Australia has never had its own equivalent of Freddie and Fannie. Instead, we have a handful of private firms which securitise a small portion of our mortgages, meaning the banks have to bear the brunt of the risk if they choose to lend at fixed rates.