Guys, not sure if this is the correct thread to ask, but I could not find the answer in other threads and I always wondered. I do not work for the banks so I am genuinely curious how they do it. A lot has been discussed about arrears as the primary reason behind high SVR rates, so that the banks "have to charge 4.5% because they have 15% mortgages in arrears" and the like.
But how does one compute? Suppose you have a 30-35-y mortgage. First 10 years you cover 3/4 to 2/3 in interest. If I understand corectly, the bank does not borrow your loan for 30-35y at the same time as you do, they fund on an ongoing basis. The bank then borrows for 1-3 years at 1-2% annual rate, so that the cost of money for 3 years is say 6%, and then again, and again, right? But they extract 60-80% in interest from you in these 1-3 years. I must be missing something obvious because even if there is one nonperforming loan for one performing loan, the difference between compound interest in long-term loan and short-term interest the bank borrows money at is huge. Certainly, once you include shorter terms the difference is lowered but still, a short-term comound interest amount is so much lower than a long-term one, beats every time. Even if there are mass arrears, they should be in profit regardless.
I must be missing something fairly obvious, this cant be right?
But how does one compute? Suppose you have a 30-35-y mortgage. First 10 years you cover 3/4 to 2/3 in interest. If I understand corectly, the bank does not borrow your loan for 30-35y at the same time as you do, they fund on an ongoing basis. The bank then borrows for 1-3 years at 1-2% annual rate, so that the cost of money for 3 years is say 6%, and then again, and again, right? But they extract 60-80% in interest from you in these 1-3 years. I must be missing something obvious because even if there is one nonperforming loan for one performing loan, the difference between compound interest in long-term loan and short-term interest the bank borrows money at is huge. Certainly, once you include shorter terms the difference is lowered but still, a short-term comound interest amount is so much lower than a long-term one, beats every time. Even if there are mass arrears, they should be in profit regardless.
I must be missing something fairly obvious, this cant be right?