Bank profits from mortgages

robinwales

Banks are currently enjoying large profits due to the sharp rise in interest rates. The extra money you pay via your mortgage goes straight to the banks. The Bank of England are controlling this in order to curb inflation by essentially taking money off you so you can't go out and spend so much in the general economy.

Might it be better for customers if they put up rates as they are doing, but all of the extra income (from interest) that they receive was used to pay off the capital owing on your mortgage, instead of it going to the banks as profit? People would still be struggling economically as they are now, but they would at least have their mortgage capital further reduced in addition to the capital repayment they are already making. The same principle would work for interest only mortgages - your capital sum would be reduced. When you eventually sold your house, or re-mortgaged, you would owe less capital than when you started. It would effectively be forcing people to save but at the same time would help control inflation.

It doesn't cost the banks any more to service your mortgage when rates go up. Why should they keep that money? And I don't think that extra money from higher rates should go to the government in the form of a windfall tax on banks, as some have suggested. The money belongs to the mortgage holder, not the banks, and not the Exchequer. 

MorningcoffeeIV

robinwales said:

Might it be better for customers if they put up rates as they are doing, but all of the extra income (from interest) that they receive was used to pay off the capital owing on your mortgage, instead of it going to the banks as profit? 

You can't put interest rates up without the amount of interest paid going up (assuming the same balance). If it goes into the capital, then it's simply an overpayment.

Banks won't absorb the increased risks and increased costs of inflation on behalf of the customer. 

kingstreet

Typically, a mortgage lender buys-in the funds for a mortgage product at a set rate in the money market and lends it at another with a fairly low fixed profit. Higher rates make more for the funders, not necessarily for the retail lenders themselves.

robinwales

MorningcoffeeIV said:

robinwales said:

Might it be better for customers if they put up rates as they are doing, but all of the extra income (from interest) that they receive was used to pay off the capital owing on your mortgage, instead of it going to the banks as profit? 

You can't put interest rates up without the amount of interest paid going up (assuming the same balance). If it goes into the capital, then it's simply an overpayment.

Banks won't absorb the increased risks and increased costs of inflation on behalf of the customer. 

But the reason the BoE is doing this is not working. Inflation is only reducing very slowly, and it is crippling the country, both for business and mortgage holders. It is a blunt instrument to massively increase the base rate and hope that it won't cause too much damage. My suggestion is to use that instrument to control inflation, but at least give mortgage holders some of the money back in the longer term. Why are banks making record profits?

MorningcoffeeIV

Indeed. But that's a separate discussion. 

Until the BoE stop raining rates, lenders will continue to react 

robinwales

MorningcoffeeIV said:

Indeed. But that's a separate discussion. 

Until the BoE stop raining rates, lenders will continue to react 

I think it's variable rate mortgages that are the problem from the customer end. There doesn't seem to be any limit on how much the rate can rise on a variable rate. I recall having a 14% mortgage rate in 1993. If a variable rate mortgage went up to that level now you would be paying £29k a year on a £200k mortgage. Perhaps variable rates should be stopped? You take out a fixed rate mortgage and you know what your current and future costs are. With variable rate you are in the dark, as people are now finding out. If you have a fixed rate and the rates get lower (cheaper) then you can just re-mortgage for about £1k costs.

Banks are often pretty strict about lending limits, but having given you a variable rate they can then massively increase your costs by their own actions, which seems to me to to contradict their initial caution in giving you the product.

DullGreyGuy

robinwales said:

MorningcoffeeIV said:

robinwales said:

Might it be better for customers if they put up rates as they are doing, but all of the extra income (from interest) that they receive was used to pay off the capital owing on your mortgage, instead of it going to the banks as profit? 

You can't put interest rates up without the amount of interest paid going up (assuming the same balance). If it goes into the capital, then it's simply an overpayment.

Banks won't absorb the increased risks and increased costs of inflation on behalf of the customer. 

But the reason the BoE is doing this is not working. Inflation is only reducing very slowly, and it is crippling the country, both for business and mortgage holders. It is a blunt instrument to massively increase the base rate and hope that it won't cause too much damage. My suggestion is to use that instrument to control inflation, but at least give mortgage holders some of the money back in the longer term. Why are banks making record profits?

It is working but it takes time to work through... material increases only started 14 months ago and then it was from a very low base. Many people will be on 2 or 5 year fixed deals and so will have been protected against it to date. In theory they'd have ideally started saving up now for when their deal ends but many people put their head in the sand and think of dealing with it when it happens or hopes that in 3 years time it'll have gone back down. 

k12479

robinwales said:

It doesn't cost the banks any more to service your mortgage when rates go up...

Increased risk of defaults, costs of dealing with 'Mortgage Charter' inquiries, short term implications of mortgage charter options e.g. on cashflow, reduced demand for new mortgages...all have a cost that someone has to pay for, that someone being customers.

johnhenstock

k12479 said:

robinwales said:

It doesn't cost the banks any more to service your mortgage when rates go up...

Increased risk of defaults, costs of dealing with 'Mortgage Charter' inquiries, short term implications of mortgage charter options e.g. on cashflow, reduced demand for new mortgages...all have a cost that someone has to pay for, that someone being customers.

none of which happen if you keep interest rates at a similar level... it will never be the case, obviously, those billions in profit are way too attractive, but hey.

dunstonh

Banks are currently enjoying large profits due to the sharp rise in interest rates

No they are not.   The net interest margin is actually still a bit lower than the long term average.

. The extra money you pay via your mortgage goes straight to the banks. 

No it doesnt.

Might it be better for customers if they put up rates as they are doing, but all of the extra income (from interest) that they receive was used to pay off the capital owing on your mortgage, instead of it going to the banks as profit? 

Why should the bank give you charity?
The source of funds that are used to lend people money would not be available, and the banks would go out of business.

It doesn't cost the banks any more to service your mortgage when rates go up

Yes it does.

CSI_Yorkshire

Just to reiterate that point:

Interest on your mortgage =/= profit for the bank.