How do banks make money from mortgages?

Z

z106

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Ok FOlks - if anyone can answer this for me I would be VERY grateful.

So - as the subject says,the question is how do banks make money from mortgages?

I have asked many people this and NO ONE knows !!

Lets go through 1 example.
ANd before people anwer in general terems can yee try to just answer in the context of te example please.

SO - lets say for arguments sake that interest rates are the same as inflation at 5%.
At the beginning of the year I borrow €1,000,000 on an interest-only mortgage.
By the end of the year lets say I pay back the initial capital along with the interest.i.e. I have paid back €1,050,000 - which obviously due to inflation means that it is the same amount in real terms as the €1m was 12 months ago.
i.e. the banks have made no money in real terms.

Can anyone explain how they have made money in that example.
Obviously something goes on in the background.
What is that something?
 
Say - you are borrowing the money @ 5% - they borrow it at cost of funds plus a margin to bring it up to 5% - that margin is the profit!
 
What is the rate they borrow it at? The ECB rate ?
If it is,then they would only be making 1% or so.

I definitely don't think anyone would be happy with a 1% Return on investment (albeit guaranteed) - least of all a bank given all their investment expertise.
 
The bigger you are the lower the intrest rate you will get, if you think of intrest rates as the price for buying money the bank makes money in exactly the same way tesco does for milk. They can buy it cheaper and sell it on to you on a mark up. That's their profit.
 
Ya - but if see my previous mail, are you saying so that the banks make only 1%-1.5%-ish only on mortgages?
 
That's per annum - and consider the size of the mortgage lending book in Ireland - it adds up!!
 
There is also a lot of accounts with money in them paying very little interest, they use this money as well.
 
qwertyuiop said:
What is the rate they borrow it at? The ECB rate ?
If it is,then they would only be making 1% or so.

I definitely don't think anyone would be happy with a 1% Return on investment (albeit guaranteed) - least of all a bank given all their investment expertise.
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yes but if you have thousands of customers on all those 1 per cents you have a huge profit, they are not investors, they are a business.Tesco only make 5 p on a carton of milk so why would you do that?
 
Hang on - now that is the reply I have gotten from people in the past.
So when I said no one can answer it for me I should have said I no oner can answer it to my satisfaction.

I disagree that a lot of 1% adds up.

Banks are businesses - with shareholders.
WIth a major wing of ur business only making 1% profit is surely hard to believe.

WHat 1% adds up to in cash terms is surely irrelevant.
That may be fine for an individual.

But for a compoany with shareholders it's surely all about percentage returns ?

The assumption I am making is that I believe if a bank had all that money,instead of giving it out to customers for their guaranteed 1% profit,surely they would invest it in something else to return bigger returns than 1%?
 
jammacjam said:
yes but if you have thousands of customers on all those 1 per cents you have a huge profit, they are not investors, they are a business.Tesco only make 5 p on a carton of milk so why would you do that?
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Exactly...it's like the car business. Many of the bigger garages make only 1% but that can be 1% of €500 million!
In the banks case the figures are astronomical...plus they make a lot more money on their other products.
 
qwertyuiop said:
Hang on - now that is the reply I have gotten from people in the past.
So when I said no one can answer it for me I should have said I no oner can answer it to my satisfaction.

I disagree that a lot of 1% adds up.

Banks are businesses - with shareholders.
WIth a major wing of ur business only making 1% profit is surely hard to believe.

WHat 1% adds up to in cash terms is surely irrelevant.
That may be fine for an individual.

But for a compoany with shareholders it's surely all about percentage returns ?

The assumption I am making is that I believe if a bank had all that money,instead of giving it out to customers for their guaranteed 1% profit,surely they would invest it in something else to return bigger returns than 1%?
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Well if you disagree that's fine but that's how they make the money.
 
It may translate to what sounds like a lot of cash - but they also have an astronomical number of shareholders.

I heard some theory before about how apparently they immediately sell on mortgages to investors.

Does anyone know anything about that ?

I'm very bague on teh details of it.
 
jammacjam said:
Well if you disagree that's fine but that's how they make the money.
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Jammacjam - I'm not saying you're wrong.
It does sound dodgy to me though.
Then again I am from an IT background so obviously i'm no expert.

I don't mean this in a smart way but what is ur own background ?
Yiu seem pretty certain you're right. ARe u in finance?

As in do you know for a fact - or it's an assumption you're making.

Again - I don't mean it in a smart way.
If you are from a banking background and can assure me 100% then I'm all the happier with that.
 
qwertyuiop said:
Jammacjam - I'm not saying you're wrong.
It does sound dodgy to me though.
Then again I am from an IT background so obviously i'm no expert.

I don't mean this in a smart way but what is ur own background ?
Yiu seem pretty certain you're right. ARe u in finance?

As in do you know for a fact - or it's an assumption you're making.

Again - I don't mean it in a smart way.
If you are from a banking background and can assure me 100% then I'm all the happier with that.
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yes I am in finance, with a related degree. I didnt mean to sound rude I dont know how else to explain it to you,

I know it sounds dodgy but go back to the milk, tesco makes 5 cent on each one why would you do that? because you have a vast amount of customers who buy the milk/ borrow the money and all this combined makes your money for you, 1 per cent of 500,000 is a lot of money if you have 100,000 customers, for example. You also sell lots of other products like life assurance and tracker bonds and all these slices combine to make a huge amount of money.
 
jammacjam said:
yes they have to sell some of them on to reduce their risk.
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Hang on - now you're saying that there is some risk.

I thought you said a while ago that they borrow at one rate and lend at a higher rate.

WHich begs the question,exactly what risk are they trying to reduce?
 
qwertyuiop said:
It may translate to what sounds like a lot of cash - but they also have an astronomical number of shareholders.

I heard some theory before about how apparently they immediately sell on mortgages to investors.

Does anyone know anything about that ?

I'm very bague on teh details of it.
Click to expand...

Google securitization.
 
qwertyuiop said:
Hang on - now you're saying that there is some risk.

I thought you said a while ago that they borrow at one rate and lend at a higher rate.

WHich begs the question,exactly what risk are they trying to reduce?
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The risk of your customer not being able to pay you back, currency risk,economic risk, risk of dependency on property.
 
Ok - forgive my maths but analyse the following.

Last year Bank Of Ireland made €2bn.

I think I read someplace that 60% of their business is from mortgages. i.e. €1.2bn.

If that translates to their 1% then that would mean they gave out €120bn. in mortgages - or €10bn a month.

Is that a fair estimation so of how much BoI give out in mortgages?
 
qwertyuiop said:
Ok - forgive my maths but analyse the following.

Last year Bank Of Ireland made €2bn.

I think I read someplace that 60% of their business is from mortgages. i.e. €1.2bn.

If that translates to their 1% then that would mean they gave out €120bn. in mortgages - or €10bn a month.

Is that a fair estimation so of how much BoI give out in mortgages?
Click to expand...

60% of your business does not mean 60% of your profits
 
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