How the banks rake in billions

THE big banks are pocketing at least half the size of your original home mortgage in pure profit.

banks profiting on interest rate rises / file

THE big banks are pocketing at least half the size of your original home mortgage in pure profit.

The Sunday Telegraph can reveal today for the first time one of the industry's closely held secrets - just how lucrative residential mortgages are for banks.

Senior industry sources have disclosed that the big four are raking in as much as $150,000 profit over the 30-year life of the typical $300,000 mortgage, equating to around $5000 a year for every borrower. The sources say between 1.80 per cent and 2.10 per cent of the average standard variable rate, now at 7.80 per cent, is pure profit.

It varies from bank to bank, according to how it sources funds, and its cost base - such as the size of its branch network, the number of customers and size of its staff.

According to the Reserve Bank, the big banks' typical margin between the banks' mortgage rate and their cost of funds is now 2.50 per cent. What people outside of the banks have never known is how much of that is accounted for by running costs.

But the mark-up of 1.80-2.10 per cent means that over 80 per cent of the margin over the cost of funds is pure capital return, helping boost returns for shareholders and ramping up executives' bonuses.

Data released in June by the Australian Prudential Regulatory Authority (APRA) shows the profit margins for the banks across their entire business at 1.7 per cent, but does not reveal the margin on home loans. In dollar terms, the sums involved are eye-watering and only get bigger the higher that rates rise.

"While rate rises are a terrible blow for borrowers, the banks love rising rates because their revenue in dollar terms just grows and grows," professor of banking and finance at the University of Canberra, Milind Sathye, said.

For example, while a bank operating on a margin of 2.10 per cent might make $150,000 on a $300,000 loan over 30 years if rates stayed at 7.80 per cent, if mortgage rates rise to 8.50 per cent, then the amount they would make increases to $154,879, assuming the same $300,000 mortgage.

"When there was a lot of competition around in the 1990s, the banks were operating on a margin of 1.20-1.50 per cent, and that was before costs," Mark Bouris of Yellow Brick Road, the financial services company, said.

Read more at The Sunday Telegraph.