Banking at the most fundamental level is a “spread” business.
Traditionally banks take in deposits at “x” and loan them out some multiple of x, and the difference between what they pay in deposits and what they charge on their loans is called “the spread.” The bigger the spread, the more they make.
The goal, as a savvy borrower or investor, is to minimize the spread you pay, either by lowering the rate you pay on loans, increasing the rate paid to you on deposits, or both.
Right now, there is quite a discrepancy between various interest rates being charged and paid among banks, brokerages, and mortgage companies. For savvy borrowers, investors, and business owners, this is an opportunity.
Here’s an example: mortgage rates today are higher than they’ve been in over 20 years, hovering around 7%+. Borrowing $1M to buy a home today will cost roughly $6,650 a month at 7% with a traditional mortgage. Currently, many large banks are paying near 0-1% on checking/savings accounts, so the spread to the typical person could be 6%.
There is a better option today for borrowers with a sizable investment portfolio—a loan that doesn’t use your home as collateral, at a much lower rate, interest-only, with no underwriting, no credit score required, and cash in hand in just a few days. Coupled with a short-term Treasury Bill, the spread can be brought down to far less than 1%.
Does this work for business loans, auto loans, or other types of loans? Yes. Retirement accounts do not qualify.
Do you know your spread?
-Paul R. Rossi, CFA