How do banks make money from mortgages?

They don't have to do anything, because they only have to hold a percentage of the loans as a reserve. Money that they lend out comes back to them as deposits, which they loan out again, etc etc. As long as there isn't a run on the bank, the system works.
 
If you look at table 1 in the wikipedia link I posted above, you'll see what I mean, its explained much better than my sausage fingers could manage.
 
So say if banks in Ireland have a 10% reserves requirement.

Does that mean that for every €100 in deposits they have sitting in an account, they can lend €1,000?
 
Sherman said:
So say if banks in Ireland have a 10% reserves requirement.

Does that mean that for every €100 in deposits they have sitting in an account, they can lend €1,000?
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You can't just turn €100 deposit into a €1000 loan by adding a zero. The reserve requirement has got to do with regulatory and solvency reasons and has nothing to do with profits in the sense that you talking about it. Its a balance sheet guys. It has to balance. If there is an asset on the balance sheet, it has to be funded by a liability.
 
ang1170 said:
the amounts loaned at the higher rate are much higher than the amounts borrowed (or held on deposit) at the lower rate
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Do you have any concrete data on typical multiples in Ireland. The Wikipedia link mentioned a theoretical max of 3.33 with a reserve ratio of 30%
 
The bank liquidity ratio means that the bank can lend more money than it has to repay. In order to lend you €1,000 it must have €1,000. However the banking system only needs to have €300 (assuming a liquity ratio of 30% has been imposed by the central bank)

Bank of Ireland or AIB do not print money any more. The central bank does. Traditionally money was precious metal and its value depended on the metal it was made out of. Therefore a silver dollar was worth less than a gold soverign.

As banking systems evolved rather than carrying around a gold bar in your pocket to buy something you gave the gold bar to the bank and they gave you a note to say you had a gold bar. If the bank was minding €1,000 worth of gold in its vault it would issue notes and coins to the value of €1,000.

The banks then worked out that the owners of the €1,000 in gold were not all going to arrive into the bank on the one day and look for their gold back. Therefore the bank issued more bank notes. So it went and printed another €2,000 in notes and loaned them out to its customers. Now it was paying interest on €1,000 but was charging interest on €3,000 and making good profits. The difference between the rate it was paying out and what it was charging on the loans became acidemic, it could pay the same interest to deposit holders as it was charging borrowers and still make money.

Your point in relation to borrowing €1,000 from your bank is valid. The bank does have a coresponding liability for each asset. The banks make the profits they do because the banking system has more money in circulation than deposits or assets.

This is how you got a "run on the bank". People know that the bank had less money in the safe than it had loaned out and if you didn't get to the top of the queue to get your cash then you were goingto be left with nothing.

The banking system makes the money, the individual banks just slice up the cake between them.

Apologies if the post came accross as a bit simplisitc.
 
Sunny said:
You can't just turn €100 deposit into a €1000 loan by adding a zero. The reserve requirement has got to do with regulatory and solvency reasons and has nothing to do with profits in the sense that you talking about it. Its a balance sheet guys. It has to balance. If there is an asset on the balance sheet, it has to be funded by a liability.
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I never claimed that's how it works. Its a process.

It would start by lending out 90 of the 100, then receiving it back as a deposit. Liabilities are now 190, Assets are the loan of 90 plus the initial deposit of 100. The books balance.

Now the bank can lend out an extra 81 (90% of 190 = 171. Subtract existing loan of 90). Then receives it back as a deposit. Liabilities are now 271. Assets are the initial deposit of 100, the first loan of 90 plus the second loan of 81 = 271. Again the books balance.
Feel free to correct me.

You can't just turn 100 into 1,000. But by rinsing and repeating the above (extremely simplified) process you approach the maximum of 1,000 asymptotically.
 
After thrashing that one out to death, I presume the OP's question can be considered answered:

qwertyuiop said:
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?
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- they make their profits from the differential between the rates
- and on top of that, yes, there is something going on in the background: there's more loaned out than held on deposit
 
The way I look at it, is that if you view the mortgage of 1000000 as a single product ie they buy a mortgage product (1000000) at ecb rate of 3.5%, and they then sell it to you at 5% The mortgage product costs them 35000 to buy, (100000 x .035) and they sell it to you at 50000. Therefore they are making 15000 profit on their investment of 35000, making a net margin of 30%.
Furthermore, banks use their deposits to lend to people, giving very poor interest on the deposits yet charging 5% on the mortgage. Using your example, they would give less than 1% interest to the depositer, and charge you 5% on the mortgage, making a profit of 40000 and a net margin of 80%.
To conclude, dont worry the banks are making plenty of money from your mortgage.
 
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