Mortgage lenders are in business and make their money from loans. They lend from their funds directly and differentiate themselves from brokers who make their money by being intermediaries between lenders and borrowers. Lenders fund loans by borrowing cash from bigger banks typically at an agreed interest rate or may utilise money from depositors. They then make money from the fees they charge while processing the loan and from the loan itself. It is important to ensure that you always get your mortgage from reputable institutions. Online reviews sites such as UK.collected.reviews can help you with reviews about finance companies, thus allowing you to identify reputable finance companies to get your mortgage. This article covers ways in which bank and other mortgage lenders make money.
Yield spread premium
Typically mortgage lenders utilise their depositor’s funds or borrow funds from bigger banks at low-interest rates to extend loans. The yield spread premium refers to the difference between the lender’s interest rate to the homeowner for a mortgage extension and the lender’s rate to repay the borrowed funds. For instance, a lender can borrow funds at an interest rate of 4% and extend a mortgage at an interest rate of 6%; thus, the loan earns a 2% interest.
Loan origination fees
Lenders utilise their funds to extend the mortgage and thus typically charge an origination fee that ranges between 0.5 to 1% of the value of the loan, which should be paid together with the payments for the mortgage. This fee has the effect of increasing the general rate of interest paid on a mortgage and the home’s total cost. For instance, a loan of €200,000 having an interest rate of 6% for 30 years with an origination fee of 2%. A homebuyer will pay a €4,000 origination fee and other pertinent fees when finalising the loan. A 6% payment of the mortgage per month of €200,000 is €1,199. Including the €4,000 origination fee spread out to the 30 years will have a monthly increment of €11.11, making the total amount to be paid monthly €1,210. The total interest rate that a homeowner will pay will be 8% and not the supposed 6%. Thus, the high rate of interest results in much of the homeowner’s money going to the mortgage and increasing the loan’s total cost.
Closing costs
Over and above the loan’s origination fee, there is the processing fee, the loan lock fee, the application fee, and the underwriting fee, which are all paid when closing. Depending on the lender, closing costs differ. Homebuyers should be watchful while reading the fees list and have a conversation with the lender before deciding on taking the mortgage to know whether a homebuyer can negotiate on some charges.
Interest rates
This is the main way that banks and mortgage lenders make money. Typically the lender will get the money from depositors who currently don’t require to use their cash. The depositors are, in turn, remunerated with a specific rate of interest and security for their money. The bank or mortgage lender will then lend out the depositor’s cash to borrowers who immediately need the money. The lenders will then pay the funds they have borrowed at interest rates lower than those paid by depositors. The mortgage lenders and bank make their profits from these rates of interest spread over the mortgage period.
Fee-based income
While offering services, banks usually charge fees with no accompanying interest rates. For instance, on opening a bank account, the bank can charge some monthly fees for sustaining the account open. There are also other products and services offered by banks and are charged. Some of these include:
- Savings accounts
- Credit card fees
- Checking accounts
- Custodian fees
- Investment management fees
- Mutual refund revenue
Banks also offer their clients wealth management services and profit from the fee they charge from these services.
Income linked to capital markets
Banks offer investors and corporations capital market services. Typically the capital market is a marketplace that matches investors with businesses that require capital to help them fund their growth. The investors provide such businesses with the capital they need, and in return, the investors will need a return on their capital. Services that banks offer to facilitate capital markets include.
- Underwriting services
- Sales and trading services
- M&A advisory.
It is, however, important to know that income related to capital markets is highly volatile. This is because capital markets mainly depend on the market’s activities within a particular period which can significantly fluctuate.
In conclusion, this article has provided various ways that banks and other mortgage lenders make money.