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

kmmr

dzug1 wrote: »

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.

Well, that was the theory. That there was no risk to the bank. The problem in the last year or so is that the banks discovered that if they just let the losses flow through to their investors, then the investors disappear and won't invest in the other things the bank is trying to sell!

So some banks have had to step in and support the trusts - by paying a higher rate with a guarantee, or by taking back some of the worst of the loans, or a number of other options. Anyway, the model of on-selling all risk was a good part of the problem, why worry about risk when it seems you can just sell it.

Ah securitization - it's a bottomless pit of complexity and fun!

kmmr

chedges wrote: »

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.

Don't forget the fixed rate that they swap the floating rate for will be similar to the 5%. So if, for example, we are talking about a 2 year fix, then the bank gets the margin of

customer rate
minues the fixed 2 year swap rate.
minus the 1% over Libor cost.

Which is why you need to look at the appropriate 2 year (or whatever term you are borrowing) rate to get an indicator of how much the banks should be charging for those loans.

powerwin

Disneys wrote: »

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

If you don't mind saying, who did you get your mortgage with?

Rgds

Disneys

Thank you to all who have answered. I am still not quite sure, that some people understand the situation.

I pay 0.5% over BOE base rate, this is fixed for the next 23 years.

If the banks pay 1% over Libor rate currently 0.6% and then lend to me at 1% how do they make any money?

As the interest rate increases, so too does the gap between the base rate and the Libor rate. Therefore if interest rates increase the banks lose even more!

Eg. Currently money costs the banks 1.6%, they lend to me at 1% and lose 0.6%.

If interest rates increase to 5%, I pay 5.5% the libor rate is likely to be 6% banks get charged 1% over this, so pay 7% and therefore lose 1.5%.

I understand that they may have sold the deal on, but why would they ever make a deal like this, where I only pay 0.5% above base?