How Banks Profit From Mortgages

Have you ever wondered where the interest in your savings account comes from? Or why do banks give you money to switch?

Of course, any reasonable business wants to operate with the aim of making a profit, and banks are no different. So how do they make money? The interest earned from your bank is never a significant amount, could companies like Bacon Coin could be an alternative.

How do banks make money from real estate?

To make money and retain or grow their market share, banks need to sell profitable products. Banks sell financial products such as mortgages, loans, savings accounts and credit cards.

For banks to make a profit, they loan out money at a higher rate than they pay into your savings account. E.g. They may charge an interest rate of 3% on mortgages and pay 0.1% interest on savings accounts, leaving them with 2.9% as profit.

The bank can make money from mortgages in many ways such as:

  • Origination fees
  • Net Interest Income
  • Mortgage-Backed Securities
  • Loan servicing

Origination Fee

Since banks use their funds when offering mortgages, they typically charge an origination fee of 0.5% to 1%, which is due with mortgage payments. This is an upfront fee charged by the lender to process a new loan application and is compensation for executing the loan. It increases the overall interest rate paid on a mortgage.

Net Interest Income

One of the main ways banks make money is through Net Interest Income. Every bank takes and holds customers deposits and then lends a proportion of these deposits out to customers, as loans, overdrafts, mortgages and other products. The net interest income is the excess interest generated from lending to customers.

Mortgage-Backed Securities

How are banks able to keep issuing mortgages without running out of money?

That’s right, they sell your loans.

They package mortgages together as mortgage-backed securities and sell them to pension funds, insurance companies, and other institutional investors who buy them for long-term income. This generates more income and allows the bank to issue additional mortgages.

Loan Servicing

Banks can continue to earn revenue by servicing the loans contained in the Mortgage-Backed Securities they sold. If the purchasers are unable to process mortgage payments and handle administrative tasks involved with loan servicing, the bank can do this for them in exchange for a small percentage of the mortgage value.

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Author

Stefan von Imhof

Stefan von Imhof

Stefan von Imhof is the co-founder and CEO of Alts.co.  With a background in alternative asset analysis, valuations, and due diligence, Stefan was born for this world. His alternative investing  newsletter has grown into Alts.co — the world's largest alt investing community, with over 230,000 investors. Originally from Boston and later Santa Barbara, CA, he now lives in Melbourne, Australia with his beautiful wife.

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