If investing in the stock market averages an 11% return per year, then why do banks do mortgages that pay 5%?
I’m clueless when it comes to investing, but this question popped into my head the other day. I understand that stocks are more risky, but I’ve read from several different sources that throughout all time stocks have averaged something like 11%
Tags: averages, Banks, investing, market, Mortgages, return, stock, Year
Market investing averages 8%, not 11%.
Mortgages are generally more safe than the stock market, excepting these last few years.
there is no guaranteed return from the stock market, a person investing 15 years age would have no where near a 11% return. i know the 11% number comes from a post world war two to present time frame, or WWI, and is often quoted.
To truly ans your question banks offer mortgages at 5% because their own cost of capital is less. And thus they make a profit.
The yield on Stock market is not 11%. If you take dividend yield it must be around 5% (FTSE100). To work out the return you would have to calculate the growth as well and this would depend on what investment period you are using.
A mortgage doesn’t PAY 5%.
The risk free return on an investment (say a 10 year Government bond) is around 4% so this could be your benchmark. Then you move up to corporate bonds which will pay a bit more, depending on rating, and then equities which again should give more return than bonds, although their capital value can, and does, move up and down.
The idea, then, is to construct a good portfolio and adjust its constituents wisely as economic conditions change. For example if you are fully invested in shares and the economy starts to decline (like 18mths ago) you reduce your equity exposure and switch into cash and bonds. When things start to recover (like 6months ago) you start to switch back into equities and reduce cash/bonds.
well stocks may average higher but when a bank does a mortgage, this money i s much safer because if u dont pay your mortgage, u will lose your house. the bank will take your house,and sell it or auction it off. so they gonna get their money one way or another. its a win win situatoin for the bank.and in stock market you might pick a wrong stock and lose money. just because stock market may average higher dont think that its not possible for you to pick a loser.
the higher the return the higher the risk.
that is a condition that goes for ALL investments. so when people blindly go for the highest reward. for example the 5.1 interest rates on savings accounts by icesave. the risk that they lose everything is higher than when they would take an interest savings account at ING (direct) for 2.4% interest.
the stockmarket btw on average returns 8% per year. bonds return 6% on average. (over the last 100 years) when investing in bonds you run less risk than investing in stocks. this is because when a company goes bankrupt they sell all their assets to cover their bond debt. once this is payed in full the remainder goes to shareholders (if there is any)
higher returns = more risk!
mortages in general are covered by the value of the house. so there is little risk for a bank.