How much do the bank pay for the money I borrowed from them?

Disneys

I have a tracker mortgage fixed at 0.5% above the bank of England base rate, for another 23 years, I have £250k.

What I would like to know is, when I borrowed this money, did the bank make there own fixed tracker rate with the bank they borrowed from or did they borrow the money at a fixed rate? could the bank be paying more for the money than they get back from me?

If so, can they ever call the loan in or increase the rate.

MarkyMarkD

Your bank are almost definitely paying more for the money than you are paying them, but it depends a lot on where they get their funding from. There is approximately no likelihood that they are paying a tracker rate for the funds, though.

If you had borrowed from a building society, most of whom's money comes from retail savers, there is NO change that they are paying an average rate on their savings accounts below 1%, and hence they are DEFINITELY losing money on your account.

All of this is rather academic, though - your deal is sacrosanct and they cannot call it in, or increase the rate, simply because they are losing money. They can probably do so, though, if you default or miss a few payments, so I would treat your mortgage like the goose which lays golden eggs and not neglect it!

Disneys

Thank you marky markD, thats what I thought too. What puzzles me though is why they would ever agree to such a loan, as surely they were never going to make anything out it?

kmmr

Well, that is sort of the problem that the banks find themselves in now. They underpriced the loans, and are losing money hand over fist on all these tracker loans.

The reason they did this relates to the securitization market. In reality your loan has almost certainly been 'sold' to other investors, through a trust. This market seemed to be bottomless, so lenders didn't really care about making too much money on each deal, as they just sold the loans off. However, in 2007 this market suddenly started to disappear, hence the collapse of Northern Rock.

Anyway, the end result is that the banks are stuck with these low value loans, they can't sell them, and the cost to finance them is significant. But, from your point of view, assuming your bank doesn't go bust, then your deal should be safe. Read the T&C's carefully though, as recent threads here have shown that banks are trying to find ways to raise the rates.

Disneys

If I owe the bank £250k at 0.5% above base tracker for the next 23 years, and the bank are loosing money each month on the deal. Would the bank be prepared to settle the loan for a smaller amount, if I were to agree to settle the mortgage, as each month they would then not be loosing money. (If Theoretically I were to win the lottery!) There are no tie ins or early repayment penalties.

If the bank would settle for a lower figure, is there anyway of working out the settlement, and what kind of settlement figure could I hope to expect?

LD

dimbo61

You can always ask if you have a spare £250k or so and see what they say
But what happens if the BOE rate goes up to 8% in 2/3/5/7 years time
They will be making money out of you

VfM4meplse

dimbo61 wrote: »

But what happens if the BOE rate goes up to 8% in 2/3/5/7 years time
They will be making money out of you

As they have done for many years!

MarkyMarkD

I don't see any mainstream bank letting you pay off your tracker rate mortgage at a discount, for lots of reasons.

The main reason being dimbo's point - a BBR+0.5% tracker is only a disaster for the lender because BBR=0.5% which it will not be, for most of the remainder of the term of your mortgage.

So, they'll ride out a few lean years and then make some money again in future.

And if you move house, or want to borrow more money, they'll be free to make a good margin on any additional borrowing you require, and you'll practically have no option but to accept whatever high price they quote, because if you say no, you'll lose your bargain lifetime tracker.

I'm not sure about "as they have done for many years". A lifetime tracker at BBR+0.5% has never been a major earner for any lender and never will be, although it will probably move back from loss into (small) profit if rates increase.

ixwood

Disneys wrote: »

Thank you marky markD, thats what I thought too. What puzzles me though is why they would ever agree to such a loan, as surely they were never going to make anything out it?

I'd say that's a naive assumption. There's 20+ years left yet. Will they still be losing money if IR are say 10%? It's a marathon, not a sprint.

chedges

One way that they make money from your mortgage, in a very simpified way:

Bank loans loads of mortgages at fixed or tracker rates. At the moment say 2% over base or fixed at 5%.
Bank borrows money from investors to pay for this, at 1% over Libor approx 1.6% at the mo.
Interest Rate risk can be taken out to some extent, with floating deals, the bank can find investors who will be willing to swap the tracker rate (or floating rate) that they receive from the borrows for a fixed rate.

dzug1

If the bank has sold the loan on to other institutions (as stated above as a possibility) they are really not going to care that it's losing money - it's not theirs to lose. All they are doing is collecting the payments and passing them on - probably for a fee.