How do margins on tracker mortgages (variable rate mortages) vary over time?
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.
"Thanks!  Do you know how to calculate the coefficients from this part?:  ""The difference between the one-year rate and the spread coefficients represents the response to a change in the one-year rate. As a result, the coefficient on the one-year rate and the difference in the coefficients on the one-year rate and spread should be positive if community banks, on average, are asset sensitive and negative if they are liability sensitive. The coefficient on the spread should be positive because an increase in long-term rates should increase net interest income for both asset-sensitive and liability-sensitive banks.""  The one-year treasury yield is 1.38% and the ten-year rate is 2.30%.  I would greatly appreciate it if you have the time!" Bonds can increase in price, if the demand is high and offer solid yield if the demand is low.  For instance, Russian bond prices a year ago contracted big in price (ie: fell), but were paying 18% and made a solid buy.  Now that the demand has risen, the price is up with the yield for those early investors the same, though newer investors are receiving less yield (about 9ish percent) and paying higher prices.   I've rarely seen banks pay more variable interest than short term treasuries and the same holds true for long term CDs and long term treasuries.  This isn't to say it's impossible, just rare.  Also variable is different than a set term; if you buy a 10 year treasury at 18%, that means you get 18% for 10 years, even if interest rates fall four years later.   Think about the people buying 30 year US treasuries during 1980-1985.  Yowza. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. Less likely?  I don't know about your bank, but my bank doesn't owe $19 trillion. Mortgages with a prepayment penalty usually do not charge points as a condition of issue. The points, usually in the range 1%-3% of the amount borrowed, are paid from the buyer's funds at the settlement, and are effectively the prepayment penalty.  Once upon a time (e.g. 30 years ago), in some areas,  buyers had a choice of  This last option usually had a higher interest rate than the first two. It was advantageous for a buyer to accept this option if the buyer was sure that the mortgage would indeed be paid off in a short time, e.g. because a windfall of some kind (huge bonus, big inheritance, a killing in the stock market, a successful IPO) was anticipated, where the higher interest charged for only a few years did not make much of a difference. Taking this third option and hanging on to the mortgage over the full 15 or 20 or 25 or 30 year term would have been a very poor choice. I do not know if all three options are still available in the current mortgage market. The IRS treats points for original morttgages and points for re-financed mortgages differently for the purposes of Schedule A deductions. Points paid on an original mortgage are deductible as mortgage interest in the year paid, whereas points paid on a refinance must be amortized over the life of the loan so that the mortgage interest deduction is the sum of the interest paid in the monthly payments plus a fraction of the points paid for the refinance. The undeducted part of the points get deducted in the year that the mortgage is paid off early (or refinanced again). Prepayment penalties are, of course, deductible as mortgage interest in the year of the prepayment. yes, i am incorporating monte carlo return scenarios for both equity and real estate.  yeah there is a lot to consider in the case of the property being a condo where you have to account for property taxes as well as condo fees.   the two projects have entirely different considerations and it's not like the money that is injected to one is similar to the other (very different) which is why i figured there should be differing discount rates.  in any case, thanks for the discussion and suggestions. Dividend yield is a tough thing to track because it's a moving target.  Dividends are paid periodically the yield is calculated based on the stock price when the dividend is declared (usually, though some services may update this more frequently).   I like to calculate my own dividend by annualizing the dividend payment divided by my cost basis per share.  As an example, say you have shares in X, Co.  X issues a quarterly dividend of $1 per share and the share price is $100; coincidentally this is the price at which you purchased your shares. But a few years goes by and now X issues it's quarterly dividend of $1.50 per share, and the share price is $160. However your shares only cost you $100. Your annual yield on X is 6%, not the published 3.75%.  All of this is to say that looking back on dividend yields is somewhat similar to nailing jello to the wall.  Do you look at actual dividends paid through the year divided by share price?  Do you look at the annualized dividend at the time of issue then average those?  The stock price will fluctuate, that will change the yield; depending on where you bought your stock, your actual yield will vary from the published amount as well. The article John cites says no correlation, but this chart from the article says otherwise;  One sees the rate drop from 14% to 4% and housing rise from an index of 50 to near 190. (reaching over to my TI BA-35 calculator) I see that at 14%, $1000/mo will buy $84,400 worth of mortgage, but at 4%, it will buy $209,500. 2-1/2 times the borrowing power for the same payment. But wait, my friends at West Egg tell me that inflation means I can't compare $1000 in 1980 to the same $1000 in 2010. The $1,000 inflates to $2611 (i.e. an income rising only with inflation, no more) and that can fund a mortgage for $546,900. This is 6.5 times the original borrowing power, yet the housing index 'only' rose 3.8X. See that crazy chart? Housing actually got cheaper from 1980 to the peak. Statistics can say whatever you wish.  Interest rate change drove all the change in housing prices, but not quite as much as it should have.  To answer your question - I expect that when rates rise (and they will) housing prices will take a hit. In today's dollars, a current $1000 borrows (at 4%) nearly $210K, but at 6%, just $167K. If rates took a jump from these record lows, that's the nature of the risk you'd take. Ok maybe I should have went into further detail but I'm not interested in a single point estimate to compare the different options.  I want to look at the comparable NPVs for the two different options for a range of exit points (sell property / exit lease and sell equity shares). I want to graph the present values of each (y-axis being the PVs and x-axis being the exit date) and look at the 'cross-over' point where one option becomes better than the other (i'm taking into account all of the up front costs of the real estate purchase which will be a bit different in the first years).  i'm also looking to do the same for multiple real estate and equity scenarios, in all likelihood generate a distribution of cross-over points.  this is all theoretical, i'm not really going to take the results to heart. merely an exercise and i'm tangling with the discount rates at the moment. "Oftentimes, the lender (the owner of the security) is not explicitly involved in the lending transaction. Let's say the broker is holding a long-term position of 1MM shares from Client A. It is common for Client A's agreement with Broker A to include a clause that allows the broker to lend out the 1MM shares for its own profit (""rehypothecation""). Client A may be compensated for this in some form (e.g. baked into their financing rates), but they do not receive any compensation that is directly tied to lending activities. You also have securities lending agents that lend securities for an explicit fee. For example, the borrower's broker may not have sufficient inventory, in which case they would need to find a third-party lending agent. This happens both on-demand as well as for a fixed-terms (typically a large basket of securities). SLB (securities lending and borrowing) is a business in its own right.  I'm not sure I follow your follow-up question but oftentimes there is no restriction that prevents the broker from lending out shares ""for a very short time"". Unless there is a transaction-based fee though, the number of times you lend shares does not affect ""pocketing the interest"" since interest accrues as a function of time." The value does change from 12.61% to 13.48%. The difference between re-investing cashflows at 14% vs 12% is not big enough to change the rounded value. Edit: The initial cashflow is discounted at t0, meaning it's already equal to its present value and the finance rate doesn't have an effect. It does impact future outgoing cashflows, as you've noted. In a strictly mathematical sense, no. Or rather, it depends what 'long run' means.  Say today the home average is $200K, and payment is $900/mo. The $900 today happens to be about 20% of the median US monthly income (which is approximately $54,000/yr). Housing rises 4%/yr, income 3%/yr. In 100 years (long enough?) the house costs $10M but incomes are 'only' $1.03M/yr, and the mortgage, even at the same rate is $45K/month, or, to be clear, it rose to 52% of monthly income.  My observation is that, long term, the median home costs what 25% of median income will support, in terms of the mortgage after downpayment. Long term. That means that if you graph this, you'll see trends above and below the long term line. You'll see a 25 year bubble form starting in the late 80's as rates dropped from near 18% to the Sub-4% in the early 00s. But once you normalize it to percent of income to pay the loan, much of the bubble is flattened out. At 18%, $1500/mo bought you a $100K mortgage, but at 3.5%, it bought $335K. This is in absolute dollars, wages also rose during that time. I am just clarifying how rates distort the long term trends and create the short term anomalies. But the notes are always called at par, no? So you have a fixed yield which depends on the coupon and price you bought it at. I still don't see how the company doing better than expected changes the yield on your investment. Does the price only start the day based on the previous day's rebalancing? No, the tracker will open at the price according to the stock it is tracking.  So for example, if the ETF closed at $10 but the tracked stock continued trading and was priced $15 when the ETF reopened the ETF will open at $15. (Example is for a non-leveraged ETF.) Usually that is the case that when fixed rates are lower than the variable rates, it is an indication that the banks feel the next movement in rates could be down. You also need to look at the fixed rates for different periods, for example 1 year fixed compared to 3 year fixed and 5 year fixed rates. If you find the 3 and 5 year fixed rates are higher than the 1 year fixed rates this could be an indication that the banks feel rates will fall in the short term but the falls won't last long and will continue to rise after a year or so. If the 3 year fixed rates are also low in comparison, then the banks may feel that the economy is heading for a longer term down trend. The banks won't want to lose out, so will change their fixed rates on their perception of where they feel the economy is headed. Since your post in May 2011, the standard variable rate has since dropped twice (in November and December) to be at 7.30%. You will also find that fixed rates have also been dropped further by the banks, indicating additional future cuts in the variable rates. Regards, Victor "As Michael McGowan says, just because gold has gone up lots recently does not mean it will continue to go up by the same amount. This plot:  shows that if your father had bought $20,000 in gold 30 years ago, then 10 years ago he would have slightly less than $20,000 to show for it. Compare that with the bubble in real estate in the US:  Update: I was curious about JoeTaxpayer's question: how do US house prices track against US taxpayer's ability to borrow?  To try to answer this, I used the house price data from here, the 30 year fixed mortgages here and the US salary information from here. To calculate the ""ability to borrow"" I took the US hourly salary information, multiplied by 2000/12 to get a monthly salary. I (completely arbitrarily) assumed that 25 per cent of the monthly salary would be used on mortgage payments.  I then used Excel's ""PV"" (Present Value) function to calculate the present value of the thirty year fixed rate mortgage. The resulting graph is below.  The correlation coefficient between the two plots is 0.93.  There are so many caveats on what I've done in ~15 minutes, I don't want to list them... but it certainly ""gives one furiously to think"" !! Update 2:  OK, so even just salary information correlates very well with the house price increases.  And looking at the differences, we can see that perhaps there was a spike or bubble in house prices over and above what might be expected from salary-only or ability-to-borrow." Mortgage rates tend to track the yield on the 10-year Treasury note. The CBOE Interest Rate 10-Year T-Note, TNX, is a security directly related to this rate. Divide the CBOE price of TNX by 10 to get the yield.  One can also track the  10Y T-Note yield at yahoo finance using ticker symbol (^TNX).   One can also track the  10Y T-Note yield at yahoo finance using ticker symbol (^TNX).