One kind of mortgage, in the UK at least, is a tracker: the interest rate is equal to the central bank's base rate of interest, plus a constant margin. The margin can apply for the lifetime of the mortgage, or just for an initial period, after which the rate will skyrocket. In the latter case, a sensible person will remortgage after the initial period.
Right now, the base rate is 0.5%, and the lowest available margin on a lifetime tracker is about +1.5%, and the lowest available margin on a two-year tracker is about +0.79%.
Someone who needs to take out a mortgage, and who happens to be particularly interested in trackers, therefore has a choice:
- either take the +1.5% lifetime tracker, or
- take the +0.79% two-year tracker, and hope that in two years' time, there is a decent option to remortgage with.
The decision pretty much rests on whether the margins, in two years' time, are likely to be higher, lower, or the same. (It also depends on whether the loan-to-value ratio shifts enough over the two years to give access to a better rate bracket, but let's ignore that for now!)
So, how do these margins tend to vary over time? Is there any pattern at all? Do they rise when the base rate rises, or fall, or are they uncorrelated? Would economic growth drive them up or down? Is there any kind of empirical or theoretical basis to guess at their movement?