How do banks make money from mortgages?

Just reading up on mortgage books at the minute in Irish banks and irish residential mortgages accounted for just 10% of profits in BoI last year - and 6% in AIB so I think you're a little out with your 60% estimation
 
So if you had to hazard a guess, how much did BoI give out in mortgages last year?
 
qwertyuiop said:
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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But it is a bigger return than 1%.

If you regard the bank's product as money, it "buys" it at a rate of say 4%. That is, to lend you €1,000, it has to pay €40 to someone (a depositor or another bank) for the loan of that money for a year. It in turn charges you, say 5%, or €50 for the loan of the same money for the year.

Its product has therefore cost it €40 and it has sold it onto you for €50 - that's a 25% profit margin - not 1%.

The point is the bank doesn't lend its shareholders' money - it lends depositors' money and other funds it raises on the money markets. That is how it can produce a healthy return for its shareholders.
 
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.
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Banks make money not only from mortgages but lots of other types of loans with much higher margins. And other non credit products. You seem to be assuming that banks make most or all of their money from mortgages.
 
Yes - that was an assumption I was making.
ALthough Sally200 says it is only 6% for AIB.

I would have thought it was more than that given the effect that property is having on shareprices for banks these days - but i am certainly no expert.

Gonk - that's actually a very good way of looking at their return.
i.e. 25% vs 1%.
 
sally2007 said:
Just reading up on mortgage books at the minute in Irish banks and irish residential mortgages accounted for just 10% of profits in BoI last year - and 6% in AIB so I think you're a little out with your 60% estimation
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If you ran a bank at the moment one thing you try to minimise was the % of profits you attribute to the residential property market. That makes you look less risky etc.

So you may not include life assurance or critical illness or profits you make from lending to developers of residential property or the house insurance you sold with the mortgage.

Banks themselves are massive geared plays hence even a small run up in bad debt provisions can eat into profits quickly.
 
qwertyuiop,

take anglo irish bank. they have about €50billion of loans on their books. in your example, if they get 1% on each of those loans, that's €500million (each year). they actually make about €1billion a year in profits. so that would suggest they are getting about a 2% margin in profits. as previous posters say, most banks pile 'em high and sell 'em cheap... anglo pile 'em high and sell 'em dear (2% profit per annum being dear!).
 
The question was answered in the second post how did this thread get to the second page?
 
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Also remember that any money you have lying around AIB, BOI, Ulster Bank etc earning 0.25% or whatever is lent back out at rates approaching 5% plus on mortgages and 8% plus on personal loans. Now thats an attractive return! In BOI's case, customer deposits account for 42% of their total funding and this is cheap funding for the bank. You are right that banks margins are falling and under pressure due to competiton and rising rates but nothing to worry too much about at the moment. By the way, BOI had a 25% return on equity last year so don't worry about the shareholders.
 
Sunny said:
Also remember that any money you have lying around AIB, BOI, Ulster Bank etc earning 0.25% or whatever is lent back out at rates approaching 5% plus on mortgages and 8% plus on personal loans. Now thats an attractive return! In BOI's case, customer deposits account for 42% of their total funding and this is cheap funding for the bank. You are right that banks margins are falling and under pressure due to competiton and rising rates but nothing to worry too much about at the moment. By the way, BOI had a 25% return on equity last year so don't worry about the shareholders.
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This is more correct. There is roughly 1 borrower to 6 savers and deposit rates are far, far lower than borrowing (mortgage/unsecured) rates. There is a margin for costs (administration) and bad debt but the spread is where the profit is largely made.

Sarah

www.mortgagesoverseas.com
 
I can't believe this thread. To get back to the OP:

qwertyuiop said:
Can anyone explain how they have made money in that example.
Obviously something goes on in the background.
What is that something?
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The thing that's going on in the background is that the bank doesn't actually have the €1m it loans you in the first place. This is fundamental to the way banking works.
 
ang1170 said:
The thing that's going on in the background is that the bank doesn't actually have the €1m it loans you in the first place.
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Can you expand on this a bit? A house buyer gets money into their hand (or at least a cheque into their solicitor's hand) to buy a home. Where does this come from if not from the lender? Obviously the lender will probably borrow it from elsewhere but the borrower ultimately gets the money from the lender.
 
ClubMan said:
Can you expand on this a bit? A house buyer gets money into their hand (or at least a cheque into their solicitor's hand) to buy a home. Where does this come from if not from the lender? Obviously the lender will probably borrow it from elsewhere but the borrower ultimately gets the money from the lender.
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Banking 101 - they borrow it from X and lend it to Y...at a margin, make money on other people's money.
Q.E.D.
 
South said:
More correct than what?

It is the margin on the ECB cost of funds that would seem to be the most likely source of the profits.
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A banks entire mortgage book is not funded entirely from wholesale funding i.e. from other banks etc. As I mentioned above in BOI's case 42% of their funding comes from their own customers deposits on which they are are they are not paying anything close to the ECB rate. 22% from bank deposits, 11% from debt/covered bonds, 11% from Commercial paper and 14% other sources. So you can't just says a banks margin is the difference between the ECB rate and the rate it charges on the mortgage as not all the banks liabilites cost the ECB rate. As far as I can remember BOI's interest margin is about 1.6% albeit falling all the time due to falling mortgage margins and increased reliance on more expensive wholesale funding.
 
Banks make profits by using other people's money (ECB, customers, whoever) and lending it at fat margins.

Why else would the ECB rate have such a dramatic impact on us punters?
 
South said:
Banks make profits by using other people's money (ECB, customers, whoever) and lending it at fat margins.

Why else would the ECB rate have such a dramatic impact on us punters?
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Sounds like the old 3-6-3 rule that used to apply for banking

Borrow at 3%, lend at 6% and be on the golfcourse by 3!!
 
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