Refinancing of real estate loans
The first thought is that the bank also has customers who maintain day money and time deposits there. It takes the deposits of these customers, pays them a certain percentage of interest and lends the amount to the real estate buyers at a higher interest rate.
The crux of this consideration is that long-term mortgage financing faces funds that can be withdrawn from the client virtually daily. Only for time deposits with a term of five years or more, the bank has a certain security.
Funds for real estate financing should therefore come from another source.
The Bankil – the classic refinancing instrument for mortgage lending
Bankil banks, although relatively clear in number in Germany, continue to play a crucial role in real estate financing. Until 2005, the term was still “mortgage banks”, these were even more limited in number. Sparcass or Dutch Bank or Commercial Banks are now among the 47 German Bankil banks.
Bankil banks are collecting investor funds. bankil are issued and distributed to investors on the equivalent value of existing land and real estate. The interest rates on these bankil are below the interest that a real estate purchaser pays for his loan. The margin represents the profit of the bank.
How does the interest rate on bankil arise?
Now it is not the case that every Bankil bank sets its own interest rates. Frankfurt-based Dutched Rozante, known as Mekaa Bank, calculates the interest rate for all ten-year Bankilbanks on the basis of interest rates on ten-year government bonds. The interest rate on government bonds reflects the value of a bond and covered bonds fall into the category “bonds”.
Interest margin of the banks
The interest rate for mortgage lending itself consists of three components. In addition to the interest rate on the Bankil, there is the margin earned by the bank and the risk premium for a possible default on the part of the lender. This can be clearly recognized by the difference between the interest payable by the customer and the interest expenses for the bankil, which, in simple terms, represents the interest margin of the bank:
What makes bankil so secure?
bankil, in contrast to overnight money, have maturities from five years and are based on the duration of mortgage lending. The publishers thus avoid problems with refinancing, as was the case with Hypo Real Estate.
bankil are regarded as extremely secure investments because they are real assets in the form of real estate or land. For this purpose, the real estate may not be included in the bulk of the collateral of a Bankil with its actual mortgage lending value, but with a maximum of 60 percent.
Against this backdrop, the former mortgage lenders only grant mortgage loans up to a maximum of 60 percent at prime conditions. For higher lending values, interest premiums are charged, which is quickly shown by a look at the results of our mortgage lending calculator. So there is always a buffer that gives the greatest possible security.
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bankil are among the assets classified as “safe for sale”. This means that a trustee may invest funds of his ward in bankil.
And when the interest rates change?
Construction money has risen by about 16 percent from the absolute low in November 2017 to May 2018. This has no direct impact on outstanding bankil. Investors continue to receive the securitized rate, and borrowers pay the agreed interest on the existing loan. However, newly issued bankil may earn more interest. This reduces the market value of bankil already in circulation.
Through this mechanism, the returns of already issued and newly issued bankil are equalized. At the same time, it is the reason why bond prices fall when interest rates rise and when interest rates fall:
The impact of ECB interest rate changes on bankil
An increase in key interest rates means that interest rates on government bonds will rise as well. A key rate cut will also result in lower-interest bankil.
As we mentioned earlier, government bonds have a direct impact on Bankil interest rates. If the central bank lowers interest rates, this has a direct and immediate impact on deposits. Investors are withdrawing funds and investing in longer dated, higher yielding bonds. Due to the increased demand the price rises, the return sinks.
Conversely, rising interest rates mean that investors exit long-term low-yield bankil and switch to better-yielding short-term investments. The price of bankil may fall and the yield may rise. Of course, these scenarios depend on how high the interest rate change is and how large the difference between money market and capital market rates is, ie whether a change is worthwhile for investors.
What do bankil have to do with Basin IV?
As a consequence of the financial crisis, banks imposed stricter liquidity regulations known as Basin IV (successor to Basel II). There is a good reason why bank mortgage bonds became more popular against this background. Notes were issued independently of the maturities of other assets.
bankil, on the other hand, make it possible to achieve an almost 100% agreement between the funds raised and the associated refinancing capital. This circumstance leads to a liquidity optimization. bankil are classified as liquid assets in accordance with Basin IV. Thus, these papers have a better status than bonds, which are not covered by collateral (the financed real estate).
In addition, bankil can also be used as collateral in the interbank business. If the bankil have a term of less than one year, they are allocated to the so-called NFSR (Net Stable Funding Ratio). This will improve this rate. The NFSR defines the relation between the stable refinancing on the liabilities side of the balance sheet and the less liquid assets, which require stable refinancing.
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