Wednesday, July 25, 2007

Good Money

Picture by oashlynloveo

If you ever wondered how easy it was for banks to make money, take a look at this simple fact.

Let's say you want to buy an average house in a Montreal suburb. You will pay around 325 000$.

Suppose you have 25 000$ in cash and borrow 300 000$ on a 25 year term at 6.5% interest.

Around 80 000$ will go to the city to pay for the roads, sewage system, etc, etc.

The other 245 000$ will go to the contractor who built the house. Most of the money will go to pay for the material, the workers, the permits, the tools, etc. We can guess that the contractor's profit margin is, at the most, 20% and that he made 49 000$ in profits - which is very good.

As for the bank, over the 25 years, it will have made 302 838$ in interest (you can calculate yourself). Not bad, considering it is the only one that didn't work in the process!

And now, for the real kicker: What are the risks for the bank? Zero! Nil. Niet. Nada.

In the central banking system we have, banks need only keep 10% of the deposits as "garantee". Therefore, for every 100$ you deposit, they can lend 900$ to someone else. (That's what brings more and more currencies into circulation and creates inflation, but that's another story.)

Moreover, your house garantees the loan so if you default on your mortgage, the bank will seize the house.

Zero risk. No work. Maximum profit.

Not bad for something "legal".

1 comment:

Antoine said...

Killer fact that nobody should forget is that in the first years of your loan, interests make the most of what you pay the bank back each month.

That means that when you’ll go bankrupt and they’ll have to seize your house, chances are that you’ll have already paid them back for the ‘’real money’’ they invested, aka the 10% JM previously talked about. The remaining 90% are not a ‘’real’’ loss cause they didn’t even exist in the first place, only your loan authorized the bank to ‘’create’’ them.

I’m pretty sure the bank is then happy to own a brand new house it paid 10% for and got paid back more than that. I guess that’s the way it should be, after all, you do know they took all the risks, right ?

Good thing is, since you don’t own a house anymore, you’ll have to rent one. So why not this one?

Who said slavery was abolished ?