how much profit do banks make on a mortgage?

luberluber

Hi all

I am researching UK bank mortgage profits.

Leaving aside "fixed" overheads for buildings, wages, etc., does anyone know how much profit a mainstream mortgage lender makes off you?

E.g. if you pay £1,000 in interest for a month, how much is actually profit for them?

I'm talking about a normal residential mortgage (nothing weird or short-term finance etc.)

Many Thanks

se2020

If you take off all the fixed overheads then it's whatever you pay them in interest less whatever it costs them in interest to borrow the money they lend to you.

So if you pay £1000 a month in interest and they pay £750 a month intrest then they make £250 a month profit.

eddddy

You'd have to define what you mean by profit.

At the simplest level, a bank might pay savers 0.5% interest, and charge mortgage borrowers 4% interest. But banks have huge amounts of other costs.

It might be easier to contemplate, if you think about a simpler business - like a taxi. A taxi business might charge a customer £5 for a journey. Maybe the diesel only cost 25p - so you could say the taxi business made £4.75 profit. But they have to pay the driver, pay the admin staff, pay for car insurance, pay for road tax, pay for annual car servicing etc, etc.

So when you allocate the cost of all those other things, the taxi business could be making a massive loss on every journey - rather than a £4.75 profit.

It's similar (but more complicated) for banks. 

grumiofoundation

luberluber said:

Hi all

I am researching UK bank mortgage profits.

Leaving aside "fixed" overheads for buildings, wages, etc., does anyone know how much profit a mainstream mortgage lender makes off you?

E.g. if you pay £1,000 in interest for a month, how much is actually profit for them?

I'm talking about a normal residential mortgage (nothing weird or short-term finance etc.)

Many Thanks

When you say you are researching do you mean academically or just for your own interest (pun intended) e. g. you are taking out a mortgage?

If the former I don't really see what you gain from leaving aside costs and calculating a 'profit' that isn't actually a profit? But as above if interest is 2% and bank can borrow at 1% then 'profit' is 1% per year (plus fees-costs for setting up mortgage). 

If the latter - does it matter? Surely what is more important is your own 'profit'?

gab3x

there is no one rule, this depends on the rate offered and economic situation at any given time

Stenwold

luberluber said:

Hi all

I am researching UK bank mortgage profits.

Leaving aside "fixed" overheads for buildings, wages, etc., does anyone know how much profit a mainstream mortgage lender makes off you?

E.g. if you pay £1,000 in interest for a month, how much is actually profit for them?

I'm talking about a normal residential mortgage (nothing weird or short-term finance etc.)

Many Thanks

I'm assuming your research consists of more than just anecdotal feedback/opinions from the MSE forum?

There are too many variables to look at it so simply - I can't imagine the Finance Directors of financial institutions could give a solid answer. Looking at the profit margins in the annual results could give you a bit of an indication - that shows the difference between money you make (mortgage interest rates) and money you spend (savings interest rates, among other things). 

Thrugelmir

Taking Lloyds as an example. Across all forms of lending it's around 2.5% - 3% of income.  £500 of interest would net say £15 of pre tax profit. 

dunstonh

It is not a constant figure.  The net interest margin can be up at 3.9% during one period and down at 0.5% in another.   It has never been lower than it is now. which is why the banks are looking to end free banking and obtain other income streams.

Petriix

There's a common misconception that banks have to borrow money in order to lend. In truth they only have to hold a small percentage in actual capital. When you take out a mortgage, the money they lend you is created on a computer. The interest you pay is 100% 'profit' and the capital repayments simply cancel out the debt that was magically created.

Obviously they have enormous overheads and sometimes suffer losses when the debt security is overvalued. There is a balance of risk with lending. But ultimately they do have the ability to create their own money and profit from the interest.

MattMattMattUK

It is far too complicated for anyone to be able to give you a profit margin or figure for mortgages. Even if you ignore the fixed costs, trying to come up with a gross margin would be close to impossible due to fluctuations in the money markets. 

[Deleted User]

Petriix said:

There's a common misconception that banks have to borrow money in order to lend. In truth they only have to hold a small percentage in actual capital. When you take out a mortgage, the money they lend you is created on a computer. The interest you pay is 100% 'profit' and the capital repayments simply cancel out the debt that was magically created.

Obviously they have enormous overheads and sometimes suffer losses when the debt security is overvalued. There is a balance of risk with lending. But ultimately they do have the ability to create their own money and profit from the interest.

Only at certain ltv brackets.