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When interest rates were low lots of people refinanced their loans or took out new loans at the low rates. The banks are not happy about having to sit on 30 year mortgages with low rates, but there is no way for them to get the money back because of how the mortgage contracts are structured.

For example I have a loan on my house with a rate that is way below current market rates, so the bank would probably love it if I paid off my load in full, allowing them to lend the money to someone else at the new higher market rates, but I don't want to do that unless they give me something of value, but as it is I don't even know what to ask for.

Is there any way for a bank to offer to lower the principal in exchange for an immediate payout? Is there even vocabulary for discussing this kind of transaction?

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    why do you think your bank is "sitting" on that loan? It was likely sold to investors long time ago and the bank couldn't care less about the rate - they charge the investors for servicing.
    – littleadv
    Apr 17, 2023 at 19:57
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    If the bank holding the note had any interest in doing this, they would be contacting you rather than your trying to convince them. This isn't borrowing from a friend; they aren't going to negotiate individual deals except along the lines already set up.
    – keshlam
    Apr 17, 2023 at 22:09
  • @littleadv then surely the bank would love to get some money back, lend it out for higher interest, pay the lower interest to the original investor and pocket the difference. There is basically no scenario where the bank doesn't lose by having this mortgage instead of something else.
    – user253751
    Apr 19, 2023 at 16:45
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    @user253751 that makes no sense. The bank is following the contract. If the borrower has an option to repay early - the money would go to the investors, not stay with the bank. The bank cannot just assume someone else's debt without anyone noticing.
    – littleadv
    Apr 19, 2023 at 16:47

2 Answers 2

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I work in risk management at a bank and I dont think any bank will incentivize you to pay back a loan early. We certainly would not. Prepayment (risk) is only an issue if rates decline and people refinance at a lower rate. The current situation is no concern if the interest rate risk was managed properly by the bank.

There are numerous ways to get rid of interest rate risk if you have lots of fixed rate loans on your book. You can repackage and sell the mortgages to take them of your book (which means someone else at least has to deal with hedging it now). You can issue covered bonds at a fixed rate as well, which means your rate add stays constant throughout the entire period. You can enter Fixed-Float interest rate swaps, to get rid of the fixed rate. Also, central banks across the spectrum flooded banks with liquidty. The ECB created so called Targeted Long Term Refinancing Operations TLTROs where banks just sat on excess liquidity anyways. Your loan can (at least in many cases) be used as collateral or in securitization when borrowing money from a central bank or getting reverse repos from Eurex etc. It is an asset for the bank, not a liability. Having assets is almost always desirable...

Flipping it around, I would thin twice about paying back a fixed rate loan now. As long as inflation is high, and your income increases alongside, sitting on a long term low fixed rate loan is quite a good thing to have.

Lastly, there are lots of variable rate loans anyways (people love the lower initial rate). This is also easy to check because most regulations require banks to provide this data to the respective national competent authority (NCA).

Some EURO area data can be found here.

enter image description here

The original data, with newer values, should be found here.

In the US, you can look at the Mortgage Bankers Association. Ironically, the share of ARMs (adjustable rate mortgages) increased to 11 percent of overall loans and to 19 percent by dollar volume, as more borrowers continue to utilize ARMs to combat higher rates. You can also read about this on Bloomberg. As you can see, despite rising rates, there are actually more Americans willing to take out ARMs than before, mainly because a variable rate will (almost) always be cheaper to a fixed rate mortgage when you enter it.

In contrast, UK mortgage borrowers seem to be more cautious, as can be seen in chart 2 of this link. enter image description here

However, it is worth noting that UK mortgages frequently have a fixed term fixed rate that is shorter than the entire mortgage period, meaning in the medium run this can change for existing mortgages as well. The original data can be found here.

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  • In this case the bank is losing money on the mortgage and the bank would like a prepayment.
    – user253751
    Apr 19, 2023 at 16:43
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    @user253751. Who says the bank is losing money? It's extremely unlikely any bank loses money. If financed with deposits, the rate will still be below the fixed rate (we pay on average less than half a percent on all retail transactional deposits at the moment). If financed with (covered) bonds, these are usually fixed rate themselves and closely match the maturity of the loans. Moreover, the rate the bank pays on these is below the rate charged to the customers. It's unrealistic to assume you can simply replace a loan with a new one. We seldom (if ever) turn down loans because we lack cash.
    – AKdemy
    Apr 19, 2023 at 17:06
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That's not how loans work with banks. If someone wants to borrow money from the bank at higher rates than your mortgage, the bank can borrow it from the Central Bank (or whatever entity in the banking center of a given economy) at lower rates than what you're paying on your mortgage.

Plus most mortgages (at least in the US) aren't even on the banks' books anymore - they have been packaged into "mortgage bonds" and sold to investors, who want you to pay out the loan over its life since it guarantees that they get the cash flow they bought.

No, there is no incentive for the bank to lower the principal for you to pay back the loan in full early.

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    s/Federal Reserve/Central Bank/g and make your answer not US-centric...
    – littleadv
    Apr 17, 2023 at 20:12
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    What makes you think banks have unlimited ability to borrow funds from Central Banks? Apr 17, 2023 at 20:52
  • You mean they could borrow for higher rates than what they're paying on their mortgage. Depending where they live, the central bank borrowing rate could be 5%, and the asker's mortgage rate could be 2.5%
    – user253751
    Apr 19, 2023 at 16:44

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