Where does a mortgage come from?

woogadee2

Hi all,

I am new to the forums, although have been following Martin and his MSE site for some time now.

Having yet to enter the world of mortgages, and soon thinking of looking to buy rather than rent, i am curious to find out how exactly the mortgage process works - in particular, whose "money" is loaned to you to buy your house? (It's surely not the bank's/mortgage provider's) and of course it isn't other people's invested money as they can't do that...?

How is this "money" created? Does it come from elsewhere? Any further info from anyone in the know would be great, cheers.

diable

Have a look here...........

woogadee2

Oh i'm terribly sorry, have i made a childish and somewhat schoolboy-type error by asking a question about mortgages in the.....Mortgage section of the forum?

And there i was thinking that i might find an answer or some help on here rather than trawling through piles of nonsense to find it.

Sorry for being "new" Diable, i hope all your posts were worthy of a decent reply back in the day.

Optimisticred

diable wrote: »

Have a look here...........

What a muppet.

Well done for making yourself look a fool.

dwsjarcmcd

There are two main ways of funding mortgages. Put simply these are

1. Retail deposits - or the money that you and I put in our savings accounts with Banks and Building Societies. They pool these, add a margin on to cover opperating costs and profit and lend this money out as loans.

2. Wholesale finance - The lender borrows money in 'tranches' from the money markets at a fixed rate for a fixed period, again adds a margin on and re-lends to borrowers over the same period. It was this part of the market that dried up during banking crisis as banks did not lend to each other.

So the money is either 'ours' (nominally) but the savings are protected via the FSCS or another banks or similar financial institutions, which needs repaying to them at the end of the term.

David

opinions4u

Yup, the post above sums it up nicely.

The traditional source of mortgage funds is savings accounts. Nothing more complex than that. Bank or building society pays interest to a saver and then lends the money on to the mortgage customer at a rate typically 2% higher. That 2% margin (varies from time to time) covers administration, bad debts and profits.

This newer source of mortgage funds, wholesale funds, basically drove the growth in the housing market in the last 15 years. The money comes from pension funds and other investements (not just the UK but from around the world) looking to get a return that's as safe as houses. The sub-prime market and buy-to-let markets in the UK grew significantly and mortgages became far easier to get. When similar lending in the USA hit difficulties these wholesale funders assumed the same would happen in the UK. So they didn't renew their investments and the likes of Northern Rock, Bradford and Bingley and HBOS crashed.

TrickyDicky101

This is a pretty good explanation of how money is created in the economy (and deals with 1. above from dwsjarcmcd):

http://www.discusseconomics.com/banking/where-do-banks-get-their-money/

and if you've got the patience to read it this is fairly detailed:

http://ecedweb.unomaha.edu/ve/library/hbcm.pdf