A European comparison of the costs and risks of mortgages for owner-occupiers

Mortgage take-up by homeowners differs enormously across Europe. The loan-to-value and loan-to-income ratios are quite dissimilar, ranging from some 20% and 0.9 respectively in Italy to more than 90% and 3.5 respectively in some countries in northwest Europe. In addition, the mortgage characteristics vary from a short-term serial loan to a high-risk endowment mortgage based on shares. To a certain extent, a statistical comparison of the loan-to-value and loan-to-income ratios can provide a good indication of the risks that owner-occupiers run in financing their own home. At the same time, this kind of comparison ignores the causes of the risks, namely the volatility or uncertainty of future interest rates, house prices and changes in income. It also disregards the main mortgage characteristics, the cost of taking out a mortgage, and the direct and indirect subsidies, including interest deductibility, factors that have a big influence on the real costs and risks for homeowners. A Monte Carlo simulation model (simulating house prices, interest rates and inflation for the duration of the mortgage) was used to calculate the net mortgage repayments and the associated mortgage risk. This simulation was undertaken for each of the countries concerned, using the typical mortgage characteristics, etc. The costs and risks of a mortgage in various countries of Europe could then be compared.