If you have a mortgage or are considering one, then you might be interested in how lenders make their money.
Who are Mortgage Lenders?
Mortgage lenders used to just be Building Societies. They would let people hold savings accounts with them and then use that money to lend to people who wanted a mortgage to buy a home. Nowadays there are a lot more people who are allowed to lend money for buying a home. This is because the government allowed banks to be able to do this as well, which enabled more competition into the market place.
Who Can Have a Mortgage?
The lender will only allow people to borrow money if they have a property ready to buy or if they already own one in the case of a remortgage. They will check the person’s credit record as well as their earnings and financial obligations to see whether they feel they will be able to afford the repayments on the mortgage. You cannot have a mortgage if you are under eighteen. You can take out a joint mortgage too should you wish to, which does not have to be with a spouse or partner but can be with a sibling or even a friend.
How Do Lenders Make Money?
Assuming you have got a mortgage it means that a lender will give you a percentage (usually 95%) of the value of your home and you will repay it in installments, using each month over 25 years. This is a long time, but it means that over time lenders will get back the money that you borrowed and more. They make some money back by charging fees for opening an account, for making overpayments, missing payments and things like this. This will all be explained in the conditions of the mortgage. They also make money by charging interest on the loan. The interest rate will usually vary according to the base rate. It is therefore not based on the rate when the loan was taken out, but on the current rate. It is possible to fixed the rate for a certain period of time but usually the rate will vary. To make money, the lender will charge more in interest than the current base rate. This is what they are currently paying to borrow money from the Bank of England and therefore the difference will be the profit that they make. This is why, when interest rates go up, they rapidly increase theirs meaning their profit margins stay the same. When the rate falls they tend not to act so quickly so they can take advantage of the bigger difference between what they are receiving and what they are being charged. People may also think they make money from repossessing houses. This is when a person has been unable to cover their mortgage repayments over a long period of time so the mortgage company sells the house. Due to the costs of doing this they do not always manage to make back all of the money they are owed. They also will miss out o the interest payments for the remaining period of the loan.