It may sound crazy, but credit unions can make more money if they cut fees.
But it’s pretty simple. If it becomes cheaper to convert loans, there are more that will convert because it will be faster to become profitable.
Homeowners still pay 3% or 3.5% in interest on their loans
There are several explanations for this, but one of them is that the cost of a conversion is too high for it to pay off to convert the loan. This is typically when the debt is less than 1 million.
The big culprit here is the differential interest rates, and this is because, among other things, the credit unions set them so that they also make money on the repayment of the loan. The question is, do they really lose money by setting the differential rates as high as they do?
If you use an example of a 3% loan of USD 1 million
he credit union’s total income will be approx. USD 13,000 if the loan is repaid today. Of this, the profit from differential interest is approx. USD 1,900, but the customer’s expense for the differential interest is approx. USD 16,000, which we believe will cause many to refrain from converting.
Therefore, the credit union earns 0 (zero) kroner.
But what if we now think the perhaps crazy thought that the credit union says it does not have to earn on the redemption, maybe that the credit union will really put a little effort, for example. 1,900 kroner? Yes, earnings fall to approx. 9,200 kroner. But $ 9,200 is even more if the customer fails to convert, so the credit union earns $ 0?
And if you go further, the customer will now have a 2% loan that can be converted again when the interest rate rises to 3%, and the credit union will earn an additional USD 13,900 on that conversion. The credit union thus misses USD 23,100 because it has to squeeze the last USD 1,900 out of the customer in the first place.
And what about the customer?
If no conversion is made to 2% now, the customer’s net benefit is approx. USD 200 higher per month than it should be and if the customer subsequently, for example. 1 year can convert back to 3% the customer can get the debt down to 944,000 instead of the 977,000 that the debt will be on the current 3% loan.
It should not be difficult for credit unions to make the same calculation based on the following logic:
“The lower the cost, the more often the homeowners will convert their loans.”