Why do banks offer mortgage rates with a lower return than they can get investing in the market.
In: Economics
1 – There’s a market for it. People need to buy homes but oftentimes don’t have the money to buy property outright. There’s always going to be a demand.
2 – Stock markets and other investments are not a guaranteed 100% return. With mortgages the bank generally knows what they’re going to get out of the deal.
3 – There’s the potential to get the property for itself if the owner defaults on the loan >_>
1 – Mortgages are a very stable revenue source, people don’t want to lose their homes.
2 – Mortgages are always in demand
3 – Stocks are unstable, while the gains are potentially better so are the risks
4 – Mortgages are protected by the house itself used as collateral + insurance
5 – Banks don’t hold onto Mortgages in the long term anymore anyway, they sell them off as mortgage bonds to make a quick buck.
Mortgages are secured with the property as collateral. This acts as an insurance policy to minimize loss on defaults.
It’s all about risk vs return – I could say the same thing to you, about holding cash. Cash gives terrible returns, but is a ‘safe’ and ‘liquid’ asset.
There’s also portfolio theory (Markowitz) which basically suggests you should hold really safe assets alongside risky ones to balance your portfolio and give the best return in relation to risk.
In a banks case, they’ll see this as a relatively ‘safe’ asset / investment
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