The 30 Year Fixed Mortgage: The Inflation Hedge envied by the Globe

The first time I explained the 30 year fixed rate to my British family, they couldn’t believe their ears. “Wait, you locked in a fixed term rate for how many years? And banks let you do that in America?!”

Yes, America has it faults, but it is also has some incredibly capitalist characteristics. The 30 Year Fixed Rate needs no introduction to American readers, but globally, this is not the norm. In 2022, 85% of US mortgages were fixed for 30 years. This is the common standard for residential real estate owners in the USA, allowing American households to pay off their loans over 30 years, with no adjustment to the rate across the lifetime of their debt. To American readers this comes as no surprise, but to the rest of the world this concept is wild.

When the rest of the world locks in debt, they either take a variable rate, or lock in a rate for a far shorter period. That period tends to be between 2–5 years, before resetting to market rates.

So why is the 30 year fix the great inflation hedge envied by the world?
1) Long term fixed rate debt erodes in value every year:
An average person reads the word Inflation and thinks “No! Everything is getting more expensive, my savings are losing value and my income’s buying power is falling”.
A holder of 30 year fixed debt thinks “Yes! The loan I’m holding is less valuable. The $200,000 mortgage i took out 10 years ago, would only be worth $152,000 in today’s money!”
With long term fixed rate debt, not only does your loan balance get eroded by inflation, so does your consistent monthly payment.

2) Mortgage payments hold still, rents do not:
For most of us, the alternative to owning is renting. As any tenant will know, once per year you’re likely to receive a letter from your landlord titled “Rent Increase”. This letter contains a load of fluff about rising costs, market changes and a number between 2–5% detailing the rising cost for a roof over your head. The 30 year fix has no such letter, and landlords who hold the 30 year fix keep their costs relatively stagnant, whilst benefitting from those rising rents.

3) Fixed term leverage amplifies your appreciation:
By owning a property with fixed term debt, your ROI amplifies significantly. With 20% down, $40K buys you $200K worth of house. A modest 3% appreciation of your house increases your equity by $6K, juicing your returns by an additional 15%. That alone is an attractive return, but if you’re also a savvy landlord and combine that with having someone else pay off your fixed loan for you with cash left over, your return gets even rosier. Fixed term debt allows you to keep costs constant, in an asset class that grows in both equity and income every year.

Whilst the rest of the world still has many core benefits of property ownership, those benefits are diluted by the fact that their monthly payment can shoot up when their term expires, adding uncertainty and risk to their investments. So, count yourself lucky America, whilst the rest of the world are busy with their metric system, you’re busy benefitting from long term fixed debt.