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How Do Banks Make Money on Home Loans? Why Use a Mortgage Broker Instead of a Bank

  • Lenny Briffa
  • Feb 13
  • 5 min read

Updated: Jul 27

Stressed man reviewing his home loan paperwork at the kitchen table

It seems like every year, the headlines are the same: major banks announcing billions in record profits. But have you ever stopped to ask how they achieve this consistently, even when the economy is tough?

 

The answer lies in a simple acronym: NIM (Net Interest Margin).

 


The "Spread" Strategy


In simple terms, NIM is the difference between the interest a bank pays to savers and the interest it charges to borrowers. Banks grow their profits by widening this gap. They strive to pay savers as little as possible while charging borrowers as much as the market will tolerate. A fraction of a percentage point difference here generates billions in revenue.


Net Interest Margin Explained: The Formula Behind Bank Profits


Every financial institution - whether a major bank, a credit union, or an online lender - runs on the same basic mechanic: borrowing money cheaply and lending it out at a higher rate.


Here's how banks operated this in practice: they take in deposits and borrowings (money from savings accounts, term deposits, and their own borrowing from wholesale markets), then lend that money out as home loans, personal loans, and business loans. The gap between what they pay out and what they collect is their net interest margin.


The net interest margin formula:


Net Interest Margin = (Interest Income - Interest Expenses) ÷ Average Interest-Earning Assets


To calculate net interest margin in simple terms: take the interest a bank earns on its loan portfolio, subtract the interest paid on deposits and borrowings (its funding costs), then divide by the total value of loans and investments generating that income. The result is expressed as a percentage - typically somewhere between 1.5% and 2.5% for Australian banks, though this varies by institution and by year.


This percentage is also sometimes called the net interest spread, and it's the single biggest driver of a bank's annual profit. A shift of even 0.1-0.2 percentage points across a loan book worth hundreds of billions of dollars translates into hundreds of millions of dollars in additional profit - which is exactly why banks manage this number so carefully, and why the "loyalty tax" described below exists in the first place.



The Loyalty Tax


The most common way banks manage their NIM is by preying on customer inertia.


  1. The Lure: They offer flashy "introductory" rates or cash-back offers to attract new customers.

  2. The Switch: Once you are in the door, those competitive rates often quietly creep up (for borrowers) or down (for savers).


Banks bank on the fact that you are busy. They know that finding a better deal and switching banks takes time and effort, so they charge existing customers a "loyalty tax"—higher rates than what they offer new clients.



Why Banks Want You "Direct"


You may have noticed big banks pushing their "direct" channels (apps, branches, direct websites) rather than encouraging you to use a broker. This is a strategic directive. Why? Because they know that a good broker is a gatekeeper. Brokers keep banks honest by forcing them to compete for your business. When refinancers go direct, you remove the competition, making it easier for the bank to widen their margins at your expense.


When refinancers go direct, you remove the competition, making it easier for the bank to widen their margins at your expense. If you're specifically considering refinancing, our 2026 Refinancing Guide covers the process step by step.


Why Use a Mortgage Broker Instead of a Bank?


If you deal directly with a bank, the onus is on you to monitor the market annually and negotiate. If you don't, you are likely overpaying.


A good broker does the heavy lifting for you:


  1. Best Interests Duty: Unlike banks, mortgage brokers are legally required to act in your best interests.

  2. Market Comparison: We shop around to find a competitive option tailored to your needs, not just one bank's products.

  3. Annual Reviews: We don't just set and forget. We can review your loan annually to ensure it remains competitive.

  4. Hassle-Free: We handle the paperwork and process, making it as painless as possible.



Our Commitment at Orca Home Loans


If the idea of constantly monitoring interest rates and negotiating with banks sounds unappealing, we are here to help. At Orca Home Loans, we are committed to doing our utmost to secure competitive rates for our clients both today and in the future.


Don't pay the loyalty tax. Let us do the work for you.


 


Frequently Asked Questions (FAQ)


NIM is the difference between the interest income a bank earns from borrowers and the interest it pays out to depositors (savers). Banks aim to maximize this margin to increase their profits.

This is often called the "loyalty tax." Banks frequently offer discounted rates to attract new business but may not pass these savings on to existing customers. Over time, the gap between your rate and the market leader can widen significantly.

When you deal directly with a bank, you only see their products. This reduces competition and allows them to maintain higher margins. Brokers compare lenders across the market, forcing banks to offer more competitive rates to win your business.

It can be time-consuming if you do it alone, which is what banks count on. However, a mortgage broker manages the application, discharge, and settlement process for you, making the switch as seamless as possible.

We recommend reviewing your home loan at least once a year. The market changes specific lending policies and rates frequently; a rate that was competitive 12 months ago might not be competitive today.

In most cases, using a mortgage broker for a residential home loan is at no cost to you. We are paid a commission by the lender you choose, but our recommendation is based on your best interests, not the lender's or the broker's.

We don't just set up your loan and disappear. We aim to build a long-term relationship where we regularly review your loan against the market. If we find a better option or negotiate a better rate with your current lender, we let you know.

Banks make money primarily through net interest margin - the difference between the interest they charge borrowers and the interest they pay savers and other funding sources. They also earn revenue from fees, but net interest margin is by far the largest contributor to bank profits.

A mortgage broker compares options across many lenders rather than just one, is legally required to act in your best interests, and can negotiate on your behalf. Going directly to a bank means you only see that bank's own products, which reduces the competitive pressure that typically leads to a better rate.


 About the Author

Lenny Briffa is the founder of Orca Home Loans, a Sydney-based mortgage brokerage helping Australians buy with confidence. With over 25 years’ experience in banking, Lenny combines deep industry insight with practical guidance for everyday borrowers. Through this blog, he shares clear, educational perspectives on lending, property, and financial decision-making, empowering readers to navigate the home loan journey with clarity.

 

Things to be aware of


This article provides general information only and is intended for educational and illustrative purposes. It does not constitute credit advice, financial advice, or a recommendation to engage in any property or lending strategy.


Orca Home Loans is a mortgage broking service and does not provide taxation, legal, or financial planning advice. Readers should seek independent professional advice tailored to their circumstances before making financial decisions. Credit approval is subject to lender assessment and eligibility criteria.

 
 
 

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