mortgages are a little more complex, because often the bank asks you to pay back principle as well as interest.
but let's do a simplified version with all the complexities and clever fees and leverage set aside.
say a bank sells interest only mortgages and the principle remains fixed. then the amount of the principle remains unchanged and the mortgagee pays whatever interest percentage they have agreed to pay on the principle value of the mortgage. if the interest rate is fixed, they pay that fee each year. if the mortgage interest rate varies with public interest rates they pay that. and so on.
from a bank's viewpoint, it reinvests the proceeds of the interest payments in new mortgages with new customers. so it is compounding its return. not within a single mortgage contract but as a result of having a flow of new ones and holding a portfolio of them.
so if the bank borrows at 4% and sells mortgages at 6%, it has a margin of 2% on the money.
it is analagous to the war bond holder reinvesting their interest in new bonds.
if you don't pay the principle and the interest on any loan, it will likely compound. but if the interest is paid out, it doesn't.
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