Out of this, they will have to pay for bad debts, administration and a return on the shareholders' capital.
In my not so humble opinion banks, and anyone else should match the timing on their assets and liabilities. You wouldn't get a car loan over 25 years because you would still be paying long after the car was scrap. Banks do not do this, they lend to you long term and get most of their own funds short term.
I think you are confusing a few different issues here.
1) Ideally banks should match their funding to their lending. If they give out 20 year fixed rate mortgages, they should try to finance them with 20 year fixed rate bonds or deposits.
However, Irish borrowers don't like fixing for 20 years (well at the quoted rates anyway) and we don't like putting our money on deposit either.
So that is matching the lending to the funding.
2) Matching the term of the loan to the underlying asset is a separate issue.
It would not be a good idea to lend for or to borrow for a car over 25 years as there will be no underlying assets
In the same way, it is my opinion and the opinion of Swiss Banks, that there is nothing at all wrong with indefinite interest only loans for house purchase. Of course it's a good idea for borrowers to pay down expensive loans. But if they can only pay the interest, their loans should not be deemed unsustainable.
Brendan
Yes, but is my hypothetical of 120K v. 11K for the first 10 years correct in terms of numbers or I made a mistake? It can't be right, cant be that big.
A NIM of 2.21% is not particularly high by international standards - the average NIM for US banks is currently over 3%.
I do not know the data, can't say about averages. Perhaps the average NIM you refer to is skewed by subprime lending rates. My evidence is anecdotal. I know three persons who hold mortgages in the states and none of them pays over 3%. One pays at 1.65 (or 1.75) 15 years fixed, and two pay at low 2%-something, 20 or 25 year fixed. It is true if you take a mortgage in the states now, it would be over 3% but in 2011 and 2012 one could find a lower one.
Well, the average rate on BOI trackers is 1.12%, and trackers represent roughly half its mortgage book. You need to look at the overall book - banks don't finance loans individually.
I make it just under 18K for the bank at 0.7% over the 10 years but essentially your calculation is correct. A performing mortgage at 4.5% will give the bank 120K over the first 10 years even though the cost of borrowing might currently be a fraction of that. Performing SVR mortgages are making huge profits for the banks at the moment.My point is that the bank has 120,000 in play money to cover its own borrowing of circa 11,400. How can it not cover bad debts, profits and administration and still not leave a huge premium? My calculation cant be right - what did I estimate wrong?
That can't be done though because the tracker is legally a fixed margin and not 'a fixed margin plus whatever we have to put on top because other trackers aren't performing'.If a mortgage market is a quasi-insurance market where your interest is determined not only by your traits but also by others' performance (as in car insurance) then the costs of defaults should be shared across the loan book. If a tracker loan book is different, then make SVR pay for defaults and arrears among SVR holders, and make trackers pay for non performing trackers in their own loan book.
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