Housing loans are the largest and most important retail loan segment. For most individuals the mortgage is likely to be the largest single loan they ever take from a bank. Governments in many countries have encouraged the growth of mortgage lending in order to increase the level of private home ownership. In many instances governments provide tax incentives to borrowers.
Credit losses on mortgages are generally lower than on other retail or corporate loans and also more predictable. It is quite common to hear bankers and analysts argue that the Basel Accord requirements also provide an incentive for banks to make housing loans because they are only required to “set aside” 50% of the regulatory capital required for all other loans to support a mortgage. Such comments often reveal a lack of understanding of the nature of the difference between risk and regulatory capital.
Housing loans can be either fixed rate or floating rate. In the US the latter are commonly referred to as Adjustable Rate Mortgages (ARMs).
Car loans and loans for the purchase of other consumer items such as washing machines, motorbikes and televisions fall into the broad category of consumer finance. Banks compete with a number of non-bank institutions in this segment such as stores, auto manufacturers and specialist consumer finance firms.