What is the cost of borrowing for banks these days?

D

Dave Vanian

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I keep hearing that banks are losing money on tracker mortgages because many of the tracker rates are lower than the cost of borrowing for the banks. So they put up Standard Variable Rates to recoup some of that.

As I understand it banks source some of their mortgage funds from their own deposits. So it's easy to establish what the cost of those funds are.

The rest, the bank borrows. My understanding of this is that a bank doesn't borrow over the same term as a mortgage - it borrows over a much shorter term and then "re-mortgages" regularly throughout the life of a typical consumer mortgage.

So does anyone know what the typical cost of borrowing to a bank is? I think it would be useful to get a feel for how true bank claims that "they're losing money" on mortgages are, and perhaps an indication of how many more increases might be on the way.

DV
 
Dave Vanian said:
So does anyone know what the typical cost of borrowing to a bank is? I think it would be useful to get a feel for how true bank claims that "they're losing money" on mortgages are, and perhaps an indication of how many more increases might be on the way.
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3 month Euribor is the benchmark rate for mortgage borrowing, at the moment it is 0.64%.


www.moneybackmortgages.ie
 
Thanks NorfBank for your reply.

So this would seem to give the lie to lender claims that they're losing money on low mortgage rates? Even the lowest tracker rate ever (NIB ECB + 0.5%, currently 1.5%) isn't losing money. Okay, not making much, but not actually losing.
 
Looking at it that simplistically, then I would have to agree but what about the other costs involved in a mortgage like staff, advertising down to the price of stamps. To break even the bank would have to have a substantial margin over 0.64%.
 
I see your point but I'm not sure if I agree. A margin of only 1% over the Euribor rate would generate €1 million annual income for a lender, per €100 million lent. I know brokers who were selling more than that in a year during the boom years, so I'm not convinced that it would take a massive staff to administer. Bigger mortgage figures would generate economies of scale. And with lots of variable rates now pushing towards 2% and more over the Euribor 3-month figure, that's €2 million income per €100 million lent.

(Not trying to be argumentative here, by the way - genuinely try to get my head around how the system works.)
 
Seriously, a margin of 1% is nothing. Banks are for profit organisations, they do not have to lend money for mortgages (well they do now but not before the bailout). If you had €1m to lend and you could lend it at a margin of 1% to Joe Public with a fairly high risk of default or you could lend it to the German government through a bond for a margin of about 4%, what would you do?

I'm not standing up for the banks here, just trying to explain why rates have to increase if the flow of money to Joe Public is to increase.
 
NorfBank said:
If you had €1m to lend and you could lend it at a margin of 1% to Joe Public with a fairly high risk of default or you could lend it to the German government through a bond for a margin of about 4%, what would you do?
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When you put it like that, it makes perfect sense. And it suggests to me that the recent round of Standard Variable Rate increases won't be the last.

It does beg the question "What the hell were banks thinking offering trackers at 0.5% - 1.5% over ECB in the first place?" But then again, I guess banks weren't the only ones who made rash decisions during the boom. :eek:

Thanks for your explanations.
 
Dave Vanian said:
It does beg the question "What the hell were banks thinking offering trackers at 0.5% - 1.5% over ECB in the first place?" But then again, I guess banks weren't the only ones who made rash decisions during the boom. :eek:

Thanks for your explanations.
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They were all chasing market share, profit and bonuses.
Low margin, high volume may work for Ryanair but it's not a model any bank should copy!

You're welcome.


www.moneybackmortgages.ie
 
NorfBank said:
3 month Euribor is the benchmark rate for mortgage borrowing, at the moment it is 0.64%.


[broken link removed]
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The likes and AIB and BOI are borrowing at nowhere near Euribor.

Banks funding generally comes from a range of sources. Deposits, ECB, interbank lending, bond issues and many more.

MAybe someone on here has a rought figure?
 
The Euribor is the average of the rates the banks borrow at, depending on their risk. So the German banks borrow below the rate and the Irish banks being high risk pay more.
 
NorfBank said:
Yes, 0.64% would be the benchmark average rate
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This is ridiculously simplistic. If banks could raise funds at 0.64%, then why on earth would they want to pay joe public 3.50% for a deposit? The reality is that banks are required to hold a mixture of deposit maturities for liquidity purposes, so as not to have all their eggs in one basket like Northern Rock had.

Apart from the 3.50% customer deposits, part of the mix is having to hold a portion of deposits with maturity of greater than 1 year, 2 years etc. To this end, both BoI and AIB would have raised "Term Funding" in the market from institutional investors at approx. 2.00% above the benchmark swap rate, which even if the borrowed with a 3month floating rate would mean a cost of 2.64% on that funding.

banks also need to hold a portion of their margin to offset the costs of customer defaults, arrears etc, never mind overheads...oh and God help us, but maybe even a return to shareholders!!!

The ECB +0.50%, or 1.00% deals were totally unsustainable as a model, as the new Financial Regulator mentioned the other day to the Oireachtais Committee. Unfortunately for banks, and fortunately for the consumer, 70% of their mortgage books are on these ultra-low margin ECB tracker mortgages so to build up income it will have to come off the 30% that is not ECB tracker.

One other point anyone out there on ECB trackers should consider is that when rates do go up in ECB, the repayments will sky-rocket especially if on interest only. If ECB goes from 1.00% to 1.50%, that will mean a 33% increase in interest for someone on ECB+0.50% (1.50% to 2.00%). If rates go from 1% to 2% the interest goes up 67%. So unless you are putting aside the extra amount of cash you are saving compared to the higher historic rates, you are going to be bunched. So start thinking about alternatives such as fixing.
 
marksa said:
One other point anyone out there on ECB trackers should consider is that when rates do go up in ECB, the repayments will sky-rocket especially if on interest only. If ECB goes from 1.00% to 1.50%, that will mean a 33% increase in interest for someone on ECB+0.50% (1.50% to 2.00%). If rates go from 1% to 2% the interest goes up 67%. So unless you are putting aside the extra amount of cash you are saving compared to the higher historic rates, you are going to be bunched. So start thinking about alternatives such as fixing.
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Someone owing €250,000 with 20 years left on a tracker of, say, ECB+1% is currently paying €1,265 per month. If the ECB rate doubles to 2%, the repayment goes up by about €121 per month. Not fun, but not catastrophic either.

If you have a good tracker I wouldn't consider fixing as the benefit of fixing will be felt for only a few years and you'll pay extra for the first couple of those years. The pain of losing your tracker will last for the rest of your mortgage as you'll never get it back when your fixed rate ends.

Liam D. Ferguson
 
marksa said:
...the repayments will sky-rocket especially if on interest only. If ECB goes from 1.00% to 1.50%, that will mean a 33% increase in interest for someone on ECB+0.50% (1.50% to 2.00%). If rates go from 1% to 2% the interest goes up 67%...
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I referred to Interest Only will jump especially
 
Even if on interest-only, I still wouldn't give up a good tracker rate in order to fix for a few years. You'll never get the tracker again.
 
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