Where Do Mortgage Lenders Get Their Money? (2022)

If you’re in the market for a mortgage or have one already, understanding where mortgage lenders get the money they give out to borrowers can be useful to know.

Mortgage lenders get their money either from bank deposits made by people with bank accounts, borrow the money from other banks or source money from investors. The money is them lent out to people for mortgages and money is made through charging interest and various fees.

In this post I’ll run through why where mortgage lenders get their money from can affect your mortgage application and how you can use this information to get the best mortgage rates.

How The Source of Funds Can Affect Mortgage Applications

Now you have a more clear idea of where mortgage lenders get their money, you might be wondering, so what? How can this knowledge be used to get the best mortgage rates?

Where Do Mortgage Lenders Get Their Money From

Depending on the source of the funds it can impact the level of risk that the mortgage lender is willing to accept when lending out money to a borrower. This may cause a slight difference in the lending criteria that a mortgage lender will use when reviewing a mortgage application.

For example, some lenders will avoid borrowers that have bad credit or poor credit history completely as they pose too high of a risk. This also works the other way round, where certain mortgage lenders specialise in this type of market where the borrower poses a high risk, however for this higher risk the people that own the money will demand a higher return for this increased risk.

This is the main reason why people with better credit scores and more consistent incomes usually get better mortgage rates because they are perceived to be lower risk and are rewarded with a lower interest rate.

How To Get The Best Mortgage Rates

Knowing that mortgage lenders get their money from a variety of locations can help when getting a mortgage as it shows each lender will have a different level of risk they’ll be able to accept when approving a mortgage application.

This means the lower the risk you are able to demonstrate that you are as a borrower, the more mortgage companies will be interested in letting you borrow money. This then allows you have access to more mortgage lenders and help secure the best mortgage rates.

Here’s a few areas that mortgage lenders look for to help them gauge how risky you are as a borrower.

  • Consistent income. Demonstrating you have a consistent income that is likely to continue into the future will help give the mortgage companies confidence you can repay the monthly mortgage payments. This is why it’s often easier to get a mortgage if you are employed full time compared to being self-employed where you’re more at risk of your income reducing.
  • Borrowing within your limits. Mortgage lenders usually offer between 3.5 to 4.5 times your annual income as a mortgage. If you want to borrow money at 4.5 times or even higher of a multiple of your annual income you restict the amount of lenders that will offer you that money as it increases the lender risk. This will usually result in a higher mortgage interest rate.
  • Good spending habits. Mortgage lenders want to see that you can comfortably afford the monthly mortgage payments after your regular monthly expenses. Scenarios are calculated to help gauge what would happen in the event your income reduced or mortgage interest rates increased. I’ve written a post explaining what spending habits mortgage lenders look for that you may find useful.
  • Excellent credit score. Now you definitely don’t need an excellent credit score to get a mortgage, however the closer you can get your credit score to excellent the better. Mortgage lenders use this metric as a gauge of your creditworthiness and it makes a big impact to their decision and the amount of lenders that will be willing to offer you the best mortgage rates.

If you do need any help with getting a mortgage, another excellent strategy is to speak to a mortgage broker. They can give you advice aligned to your current situation and help get you the best mortgage rates.

If you’re thinking about speaking to a mortgage broker, I’ve written a post about what questions you should ask a mortgage broker that you may find helpful to ensure you’re getting value from your conversations.

How Do Mortgage Companies Make Money?

Mortgage lenders mainly earn their money through the interest that is charged on the money they give out to borrowers. This is charged as part of the monthly mortgage payment.

For example, if they approve a mortgage agreement for the sum of £300,000 at 2% interest, each year they will earn £6,000 on that money. However, if for example they pay another bank 0.5% interest for borrowing that money, they’ll have to pay £1,500 in costs for the loan, so make in total £4,500. This is known as the yield spread premium, or how much extra they make on the loan.

The amount they earn will reduce if the mortgage is a repayment mortgage, so you effectively pay down the balance with each mortgage payment. However, that will only be a small fraction of the total balance as most mortgages are paid back over at least 30 years.

Mortgage lenders also charge fees for various activities that take place throughout the mortgage process.

  • Arrangement fee. This fee is charged for taking out the mortgage product. Depending on the lender this can sometimes be free although be up to £2,000.
  • Booking fee. This is charged for the administration time needed to review a mortgage application and if it is charged it’s usually non-refundable if the mortgage does fall through.
  • Valuation fee. This fee is charged to value your property to make sure it’s worth the amount that is being ask for by the seller.
  • Mortgage closing fee. This is charged to close down your account which can happen if you switch to another mortgage lender or pay off your mortgage.

Other Sources of Income for Mortgage Lenders

Depending on the individual mortgage company, they may have a lot of other types of income sources where their mortgage lending service only makes up an element of their overall business.

Some of the other ways mortgage lenders can make money I’ve listed below. However, these aren’t the ways they’re earning money specifically from their mortgage services.

  • Credit card interest & fees
  • Overfraft fees
  • Investment management fees
  • Sales and trading services
  • M&A advisory
  • Underwriting services

Summary – Where Do Mortgage Lenders Get Their Money?

Overall, mortgage lenders get their money from bank deposits, borrowing money from other banks, or from investors. Each of these have differing levels of risk that the lender, or ultimately the owner of the money, is willing to accept when lending out the money.

I hope this post has been helpful and gives a good overview of why it matter to know where mortgage lenders get their money from. If you’re in the market for a mortgage, I hope everything goes well and remember to speak to a mortgage advisor if you need help or have any questions.