The bank. If interest rates go up a few points in the coming years, and it would be hard for them not to, banks are going to be sitting on a ton of mortgages that are not profitable.
That said, most loan originators sell the mortgage off. Many of those go to quasi governmental corporations that most people believe the US tax payers will bail out if necessary.
Ok, so in effect it's these quasi governmental corporations that assume the risk of rates going up (which would make it very lucrative to refinance), and that's where the subsidy lies.
We have fixed-rate mortgages in Norway too, but the interest rate loss or gain is realized when you refinance. Meaning that if you refinance to a lower rate, you'll have to pay the loss taken by the bank, and if you refinance to a higher rate, the bank pays you the loss you take. If you pay off the loan faster than scheduled, the same rules apply. So the risk is taken entirely by the borrower.
The banks mitigate the loss from early payment by heavily front-loading the interest - i.e. first years huge part of what you're paying is interest, and very little goes to equity (at least in default fixed payment scheme, you can pre-pay the principal if you want, but on top of the default fixed payments). The longer is the life of the loan, the more goes to equity and the less to interest. So if you close off the mortgage early, you've already paid a lot of interest that bank would have gotten. Of course, not all of it, but the bank also gets the money back earlier, so I don't think they lose too much.
A "refinance" means someone (which may be your original bank or someone else) lends you the balance to pay off your old loan, and you pay the new loan.
There's not really a loss, since the terms of your old loan allowed the early repayment.
The bank loses in that they are upside down on the spread. They have a mortgage which is paying a low interest rate but they have to borrow at a high one.
The mortgage is essentially a 30 year option, in those terms it becomes obvious why 30 year fixed mortgages wouldn't exist in an unsubsidized market.
You have to take into account all time periods from the time the interest rate charges started (beginning of loan) through to the time when the bank's loan is terminated.
They may have (potentially) had a few month's worth of being underwater but they were able to borrow at a lower rate also.
Further, there are several %age points of spread between what banks pay to borrow and what the mortgage rate is, further cushioning them. See the CIDOR here: http://www.tradingeconomics.com/canada/interbank-rate ... now compare with the mortgage rates a bank will charge.
EDIT: CIDOR under 1% but ratehub.ca says the best 5-year fixed rate you can get is... 2.42% .
It's really quite amazing if you think about it.
I know a guy who refinanced a few years back at 2.89%. That's insane as it's barely above inflation. He's basically borrowing money for free.
If inflation goes up to 5-7% over the coming years, his rate will stay at 2.89%, drastically decreasing the cost to pay it back.