If the fed interest rate is 3.75-4%, why is the average mortgage rate above 7% and most savings accounts are below 3%?
In: 2
Put yourself in the position of the bank. (ELI5)
1) Say you own a bank have 100million dollars to lend out. With just a few keystrokes you can deposit that 100m in the Central Bank and earn 4%. The Central Bank has zero risk of default. Or you can find 200 customers willing to borrow 500K each for their mortgages, go through all the paperwork to verify their creditworthiness, lend out the money and hope they all pay back their loans over a long period. Why would you spend all that extra money and time and additional risk and earn 4% – surely you’d demand more to lend out to small borrowers?
2) Say you own a bank and want to borrow 100m dollars. Again, (assuming you’re a creditworthy bank), with a few keystrokes, it is possible to borrow that money from the Central Bank and pay them 4% (or so). Or you set up many branches, hire lots of people and open retail savings account and working hard to get deposits to reach 100m dollars. Well you’re not going to pay these savings accounts 4% because because you have to justify all that additional cost of borrowing the money – you’ll pay them less than 4%.
Latest Answers