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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:

  1. either take the +1.5% lifetime tracker, or
  2. 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?

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  • We have mortgages in Canada that fluctuate with respect to the bank's prime rate; they are called variable rate mortgages (VRM), hence my edit to the title. Nevertheless, I tagged your question for the U.K. since margins/pricing practices may be somewhat localized.
    – Chris W. Rea
    Dec 18, 2014 at 13:51

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how do these margins vary over time

Depends on a lot of factors. The bank's financial health, bank's ongoing business activities, profits generated from it's other businesses. If it is new to mortgages, it mightn't take a bigger margin to grow its business. If it is in the business for long, it might not be ready to tweak it down. If the housing market is down, they might lower their margin's to make lending attractive. If their competitors are lowering their margins, the bank in question might also.

Do they rise when the base rate rises, or fall, or are they uncorrelated?

When rates rise(money is being sucked out to curb spending), large amount of spending decreases. So you can imagine margins will need to decrease to keep the mortgage lending at previous levels.

Would economic growth drive them up or down?

Economic growth might make them go up. Like in case 1, base rates are low -> people are spending(chances are inflation will be high) -> margins will be higher(but real value of money will be dependent on inflation)

Is there any kind of empirical or theoretical basis to guess at their movement?

Get a basic text book on macroeconomics, the rates and inflation portion will be there. How the rates influence the money supply and all. It will much more sense.

But the answer will encompass a mixture of all conditions and not a single one in isolation. So there isn't a definitive answer.

This might give you an idea of how it works. It is for variable mortgage but should be more or less near to what you desire.

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