How banks profit from mortgages and how you can do the same
Have you ever wondered where the interest in your savings account comes from? Or why do banks give you money to switch?
Of course, any reasonable business wants to operate with the aim of making a profit, and banks are no different. So how do they make money? The interest earned from your bank is never a significant amount, could companies like Bacon Coin could be an alternative.
How do banks make money from real estate?
To make money and retain or grow their market share, banks need to sell profitable products. Banks sell financial products such as mortgages, loans, savings accounts and credit cards.
For banks to make a profit, they loan out money at a higher rate than they pay into your savings account. E.g. They may charge an interest rate of 3% on mortgages and pay 0.1% interest on savings accounts, leaving them with 2.9% as profit.
The bank can make money from mortgages in many ways such as:
- Origination fees
- Net Interest Income
- Mortgage-Backed Securities
- Loan servicing
Since banks use their funds when offering mortgages, they typically charge an origination fee of 0.5% to 1%, which is due with mortgage payments. This is an upfront fee charged by the lender to process a new loan application and is compensation for executing the loan. It increases the overall interest rate paid on a mortgage.
Net Interest Income
One of the main ways banks make money is through Net Interest Income. Every bank takes and holds customers deposits and then lends a proportion of these deposits out to customers, as loans, overdrafts, mortgages and other products. The net interest income is the excess interest generated from lending to customers.
How are banks able to keep issuing mortgages without running out of money?
That's right, they sell your loans.
They package mortgages together as mortgage-backed securities and sell them to pension funds, insurance companies, and other institutional investors who buy them for long-term income. This generates more income and allows the bank to issue additional mortgages.
Banks can continue to earn revenue by servicing the loans contained in the Mortgage-Backed Securities they sold. If the purchasers are unable to process mortgage payments and handle administrative tasks involved with loan servicing, the bank can do this for them in exchange for a small percentage of the mortgage value.
Profit like a bank - Bacon Coin
Traditionally banks, insurance companies, and governments buy and hold trillions of dollars of mortgages each year to preserve and grow their wealth. Banks use your money for this and share a very small percentage of profits.
The Bacon Protocol launched by LoanSnap is introducing a new way for crypto wallet holders to hold a coin backed by the same types of mortgages that banks, insurance companies and governments use. This gives customers access to the $17 trillion mortgage industry.
Due to the efficiency of blockchain and the removal of many processes and people, users of the Bacon Protocol get the majority of the return, approximately 2-3% vs 0.1% a bank may give you.
Subscribe to our weekly newsletter