Since banks use their funds when offering mortgages, they typically charge an origination fee of 0.5% to 1%, which is due with mortgage payments. This is an upfront fee charged by the lender to process a new loan application and is compensation for executing the loan. It increases the overall interest rate paid on a mortgage.
Net Interest Income
One of the main ways banks make money is through Net Interest Income. Every bank takes and holds customers deposits and then lends a proportion of these deposits out to customers, as loans, overdrafts, mortgages and other products. The net interest income is the excess interest generated from lending to customers.
How are banks able to keep issuing mortgages without running out of money?
That’s right, they sell your loans.
They package mortgages together as mortgage-backed securities and sell them to pension funds, insurance companies, and other institutional investors who buy them for long-term income. This generates more income and allows the bank to issue additional mortgages.
Banks can continue to earn revenue by servicing the loans contained in the Mortgage-Backed Securities they sold. If the purchasers are unable to process mortgage payments and handle administrative tasks involved with loan servicing, the bank can do this for them in exchange for a small percentage of the mortgage value.