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, say “1.5x,” 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.
As an argute individual, the goal is to minimize the spread you pay, either by lowering the rate you pay on loans, or by increasing the rate being paid to you in your bank/brokerage, or both.
Right now, there is quite a discrepancy between various interest rates being charged and being paid among banks, brokerages, mortgage companies, etc. 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%+. Ouch.
Borrowing a $1M to buy a home today will cost you $6,650 a month (in principal and interest) at 7% with a traditional mortgage.
Currently, many of the large banks are paying near 0-1% on their checking/savings accounts. So, the spread to the typical person could be 6%. (7% - 1%).
There is a better option today for borrowers, rates are less than 6%, and it's a loan that doesn't use your home as collateral.
How about paying $4,900/month instead of $6,650 on a $1M mortgage, a 33% savings on your monthly payment with a much lower rate of 5.88%. In addition to the lower rate, the loan would be interest-only, there is no underwriting, no credit score required, and cash in hand in just a few days. Couple this 5.88% loan with a 5.45% US Treasury Bill, and you've gotten the spread down to far less than <1%. (5.88% - 5.45% = 0.43%). Your win is the banks loss.
Does this work for business loans, or auto loans, or any other type of loans? Yes.
Sound too good to be true?
It’s not, so what's the hitch? You have to have a sizable investment portfolio. *Retirement accounts do not qualify.
Do you know your spread?
-Paul R. Rossi, CFA