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Where Do Lenders Go for FundingThe question of where banks and other mortgage lending institutions get the funds they use to disburse to home and property buyers doesn’t occur to most of us. After all, why should we care where they go for their funding, as long as they have money available to loan to us? Let’s answer both those questions. The first source of funding is deposits; the money the bank receives in periodic deposits from its personal and commercial customers. You probably know banks hold some of what you deposit for a period of time before you can access your funds. In an age of electronic transfer banks generally receive the money instantly but hold it for awhile before releasing it in order to maintain a healthy active daily balance. The reason they do this has to do with a bank’s second source of funding –investors. In essence, the banks are also borrowing money at interest and the healthier the capital base of the bank, the lower interest rate they will be charged for borrowed funds. One of the most common investment sources are superannuation (pension) funds. Funds like these typically have large amounts of cash and need to invest some of it to earn interest. Finally, why should you care where your lending institution borrows its funds? The simple answer is it can cost you less to borrow money from a healthier bank or lending institution. If they have large deposit bases and are borrowing money from superannuation funds and other sources at very low interest rates, they will typically pass along some of their savings to their own customers in the form of lower interest rates on the mortgages they offer. They are also in a better position to offer lower fees and are more willing to negotiate some of those fees with an educated borrower. The implication for you the borrower is simple. Invest a little time researching the institution from which you will be borrowing money to uncover their financial health. |
