Profit Margins on Fixed Rate Mortgages

For simplicity, I will define profit on a mortgage as the difference between the interest rate that banks charge and what it costs the banks to fund that mortgage…

What banks charge is pretty straightforward to determine because it is widely advertised & there are plenty of data aggregators who compare current mortgage rate offers by institutions of all sizes from credit unions to the big five banks. Bank of Canada provides the posted mortgage rate for the last 30 years or so…

Cost of Mortgage to Banks: this depends on whether its a fixed rate mortgage or a variable/floating rate mortgage. For a fixed rate mortgage, the funding cost would usually be the yield on an equivalent term Government of Canada bond…

The current mortgage rate on 5-year fixed mortgage rate is 5.99% and the yield on a Government of Canada bond that matures in 5 years is 2.55%. The difference of 3.44% would be the banks gross profit with an astonishing gross profit margin of almost 135% (3.44/2.55)

Source: Bank of Canada

Since 1980, the profit margin has been increasing steadily as seen by the purple & red lines the chart… however, since late 2007 the profit margins have spiked and stayed there above 100%. And it is the same story for all mortgage terms i.e. 1 year, 2 year, 3 year, etc. Next I will also analyze the profit margin on variable rate mortgages.

Instead of passing on the extra savings to consumers, the banks are using the “recession” as an excuse to make wider margins. I want to know the breakdown of bank profits by division for the past couple years and why consumers haven’t benefited enough.