How much does the bank put into your mortgage? If the granting of a loan has a cost for banking establishments, the speech that would like this product to be used only to attract new customers without bringing a penny seems wrong.
It’s a slogan we’ve been hearing for a long time, but which is becoming more and more present with the increase in rates: a mortgage would bring nothing to the bank. When you ask an expert in the banking sector, the answer is clear: The margin of the bank is now very small or even zero for certain networks. I think that for many files, there is no bank margin.
Pascale Sciacaluga, commercial director of Crdit Coopratif, confirms the idea of a product that is far from being profitable: It is said that for a bank to make money, it must a minimum of two points of brokerage margin (the difference between the interest paid by individual loans and the cost of the resource that allows the bank to make credit, Ed.). But in recent years, we have come a long way.
Costs vary widely from one bank to another
Beyond this observation, it is difficult to have figures. Specifically, what are the costs for the bank? And by extension, what do they earn? Asking banks how much a home loan will cost them is like asking Tim Cook to explain the price of the new iPhone: good luck getting a detailed answer. No one discloses the construction of their margins, and we can’t ask the banks to do it, as no company does it, explains Ccile Roquelaure, spokesperson for the broker Empruntis. If everyone who offers a service starts explaining their prices, you won’t buy much.
The answer is even more complicated which varies, sometimes greatly, from one bank to another, according to the structure of its financial resources or its operation (traditional bank with a large network of branches, or online bank 100% on the Internet). There is already the cost of human resources, explains Pascale Sciacaluga. It is about all the people who sell the mortgage, manage the service after the sale, work on the schedule according to its complexity… All this is part of the cost of the workforce, which is partly reflected in application fees.
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On these administration fees, the price can vary from simple to triple depending on the establishment. They also take into account the IT cost, the bank’s operational cost, etc. The management method differs from one establishment to another, emphasizes Herv Phaure, head of the Credit Risk Advisory business at Deloitte. The more we are in a structure with an industrialized process, the more the management cost is a general fixed cost. In a less efficient structure, each schedule will generate significant management costs.
The cost of the resource increases
But the most important cost for the bank and that affects your mortgage rate is above all the cost of the resource. To get the money to lend you, the bank has two solutions: dive into its internal resources, especially through the savings of its customers, or buy it in the market. The savings are used in ALM management (bank asset and liability management, editor’s note), explains Herv Phaure. The more a bank has limited savings, i.e. savings blocked over several years, which the customer cannot withdraw as he wants (for example a PEL or a PER for example), the more it helps banks to optimize their TIC. (internal transfer rate, which defines the cost of the resource). Conversely, banks that do not have many bailouts are clearly at a disadvantage in a market where rates are rising and where you have to go outside for financing.
Because banks forced to buy their resource see the 10-year OAT, the ten-year government loan rate that serves as its benchmark, soar. The cost of credit for the bank is increasing due to the cost of the resource, develops Ccile Roquelaure. This is a quantifiable fact, since the OAT which was 0.2% in January is currently 2.25% (as of June 22, editor’s note).
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An increase of two points far from being passed in mortgage rates, which rose from 0.94% on average in January over 20 years to 1.54% in June over the same period. Today, when you are a bank that has no savers, you have probably stopped making real estate loans, or not far, notes a bank official. Banks are stuck with the usury rate and cannot pass on the increase. So, at some point, you either get stuck and stop, or you hit your own box.
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Despite the current situation, the majority of banking establishments still want to offer real estate loans, loyalty product par excellence. It’s a way to have a new clientele that will be loyal for many years, says Pascale Sciacaluga. A new customer will have their accounts domiciled, be banking, so get a credit card, home insurance… The goal is to have a global relationship with our client. We need to have a profitable relationship of course, but it is also a counseling relationship.
If the client has their accounts domiciled, the bank may also have current deposits and part of their savings, complete with Herv Phaure. Potentially, the bank will be too retrieve information about the customer and be able to offer him other products complementary such as credits, such as consumer credits, with higher margins. By winning the loyalty of a customer with the mortgage, the bank can therefore use the positive savings of the latter and offer additional offers that allow to generate profits.
A product that remains profitable
However, the speech that argues that real estate credit is a loss leader that does not give anything to banking institutions is not to everyone’s taste. To say that banks no longer make a living from credit, or even that credit would be a product sold purely at a loss, this effectively legitimizes business practices returned to other worlds such as insurance, or customer banking, analysis Aurlien Soustre, representatives of the CGT-banks and insurance on the Advisory Committee of the financial sector. However, it would be difficult to understand that the establishments are so much competition on a product on which you lose money. This dynamism is for me proof that it is a profitable product.
A report by the Prudential Control and Resolution Authority (ACPR) published in September 2021 and entitled housing financing in 2020 gives some indications regarding the margin made on housing loans. Thus, the net margin (gross margin, less management fees and the cost of risk) on new housing loans was 0.45% in the first quarter of 2021 compared to 0.12% in the first quarter of 2020. This means that each credit of 200,000 euros issued by a bank brought in an average of 900 euros, not counting the profits on the insurance of the loan and the bank charges on the account linked to the credit.
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There is a phenomenon that risks pinching the margins, is that the banks have so far granted loans at very low rates over fairly long periods, while they refinance themselves in the long term, explains Aurlien Soustre. They have borrowed at fixed rates, but have to refinance at rates that will increase slightly. According to him, however, banks continue to make money, not only thanks to the various products offered to new customers but also on the credit itself. Otherwise, they themselves will choose to offer much less real estate credit.
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