It does need to be pondered over, just where does The Times get these stories from? For here they’re claiming that mortgage holidays are going to produce bumper – hundreds of millions of quid – profits for the banks. Which isn’t quite, as we all should know, how banking works.
The £821m cost of our mortgage holidays
Lenders stand to make huge profits as unpaid home loans accrue interest
So how is this all calculated?
The mortgage breaks taken by 1.6 million homeowners could cost them at least £821 million in extra interest.
A borrower on the typical deal will save £2,256 in repayments by taking a three-month mortgage payment holiday. However, they will ultimately pay £500 more than they would have done without the break because of the interest accrued on the unpaid sum. This extra interest all finds its way to the banks.
The figures, calculated by the broker L&C Mortgages
Oh, OK, so they’ve been suckered by the PR department of some company. And failed to think through what they’re being told.
Because the assumption is – it’s right there, they’re saying it – that this extra interest becomes profit to the banks.
Ah, wait a minute. OK, so you take a mortgage holiday. You don’t pay for three months, OK, that’s fine, but you do have to pay that capital back at some point. Otherwise you’d never pay off your mortgage, would you? And, presumably, and this is what has been presumed, you’ll pay off your mortgage three months later than you would have done without the holiday. This means you’ll be paying interest on the outstanding part of your mortgage for longer then which is where that extra interest to be paid comes from.
So, the amount extra to be paid in interest is fine. Sure, it’s an average and makes some assumptions but that’s all fair enough.
It’s the idea that this will all flow through into bank profits which is so silly. For banks don’t lend out their own money at interest. Banks borrow money, paying interest upon it, then lend that money out and charge interest upon it. They might borrow from our checking accounts – this is known as the float – they might borrow from another bank in the overnight market, they could today at least borrow from the Bank of England, they might borrow from our savings accounts, they could issue bonds….the important thing about all of these sources of money being that the banks have to pay interest to get hold of that money. OK, on our current accounts it’s an entirely nominal sum normally which is offset against the costs of allowing us to use cheques etc but still. They carry costs for getting access to that money they then lend out.
So, sure, mortgage holidays mean more interest to be paid to the banks. The banks have to borrow exactly the sum – or borrow it for longer, whatever – that is deferred in those mortgage holidays and pay interest for doing so.
That is, the interest paid to the banks is not profit. It’s not even gross profit. The extra interest received minus extra interest paid could be regarded as one measure of gross profit. And the net profit will be that minus the costs of doing the doing. Which, given that the usual calculation is that it costs a bank £25 to send you a letter is going to be high. Or low perhaps, depending upon whether we’re talking about the costs of doing the doing or the amount left over after the done has been done.
It could be that the banks will make a loss on these mortgage holidays. It could be that they’ll make a gross profit but an overall loss. They might even make a profit as well as a gross profit. But absolutely none of those figures are going to be equal to the extra interest received as a result of the mortgage holidays.
‘Tis a pity the newspaper of record says they will be, eh?