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.
"Aside from the calculations of ""how much you save through reducing interest"", you have two different types of loan here.  The house that is mortgaged is not a wasting asset. You can reasonably expect that in 2045 it will have retained its worth measured in ""houses"", against the other houses in the same neighbourhood. In money terms, it is likely to be worth more than its current value, if only because of inflation. To judge the real cost or benefit of the mortgage, you need to consider those factors. You didn't say whether the 3.625% is a fixed or variable rate, but you also need to consider how the rate might compare with inflation in the long term. If you have a fixed rate mortgage and inflation rises above 3.625% in future, you are making money from the loan in the long term, not losing what you pay in interest. On the other hand, your car is a wasting asset, and your car loans are just a way of ""paying by installments"" over the life of the car. If there are no penalties for early repayment, the obvious choice there is to pay off the highest interest rates first. You might also want to consider what happens if you need to ""get the $11,000 back"" to use for some other (unplanned, or emergency) purpose. If you pay it into your mortgage now, there is no easy way to get it back before 2045. On the other hand, if you pay down your car loans, most likely you now have a car that is worth more than the loans on it. In an emergency, you could sell the car and recover at least some of the $11,000. Of course you should keep enough cash available to cover ""normal emergencies"" without having to take this sort of action, but ""abnormal emergencies"" do sometimes happen!" Advantages of buying: With every mortgage payment you build equity, while with rent, once you sign the check the money is gone. Eventually you will own the house and can live there for free. You can redecorate or remodel to your own liking, rather than being stuck with what the landlord decides is attractive, cost-effective, etc. Here in the U.S. there are tax breaks for homeowners. I'm not sure if that's true in U.K. Advantages of renting: If you decide to move, you may be stuck paying out a lease, but the financial penalty is small. With a house, you may find it difficult to sell. You may be stuck accepting a big loss or having to pay a mortgage on the empty house while you are also paying for your new place. When there are maintenance issues, you call the landlord and it's up to him to fix it. You don't have to come up with the money to pay for repairs. You usually have less maintenance work to do: with a house you have to mow the lawn, clear snow from the driveway, etc. With a rental, usually the landlord does that for you. (Not always, depends on type of rental, but.) You can often buy a house for less than it would cost to rent an equivalent property, but this can be misleading. When you buy, you have to pay property taxes and pay for maintenance; when you rent, these things are included in the rent. How expensive a house you can afford to buy is not a question that can be answered objectively. Banks have formulas that limit how much they will loan you, but in my experience that's always been a rather high upper bound, much more than I would actually be comfortable borrowing. The biggest issue really is, How important is it to you to have a nice house? If your life-long dream is to have a big, luxurious, expensive house, then maybe it's worth it to you to pour every spare penny you have into the mortgage. Other people might prefer to spend less on their house so that they have spare cash for a nice car, concert tickets, video games, cocaine, whatever. Bear in mind that if you get a mortgage that you can just barely afford, what do you do if something goes wrong and you can't afford it any more? What if you lose your job and have to take a lower-paying job? What if some disaster strikes and you have some other huge expense? Etc. On the flip side, the burden of a mortgage usually goes down over time. Most people find that their incomes go up over time, between inflation and growing experience. But the amount of a mortgage is fixed, or if it varies it varies with interest rates, probably bouncing up and down rather than going steadily up like inflation. So it's likely -- not at all certain, but likely -- that if you can just barely afford the payment now, that in 5 or 10 years it won't be as big a burden. you should always invest if your investment rate of return is higher   than your interest rate Your next line, about standard deviation is dead on.  There are too many variables to give an exact answer here, in my opinion. The main reason is that one variable isn't easy to quantify - One's risk tolerance.  Clearly, there's one extreme, the 18% credit card. Unless you are funding loanshark type rates of 2%/week, it's safe to say that 18% debt should take priority over any investments, except for the matched 401(k) deposits.  What I think you're talking about is something we've addressed here in multiple threads.  Do I prepay my sub 4% mortgage or invest? In this case, (and to Noah's comment) the question is whether you can expect a post-tax return of over 3% during your time horizon. I look at the return for 15 years from 1998-2013 and see a 6% CAGR for the S&P. I chose 15 years, as the choice is often one of paying a 30 year mortgage faster, as fast as 15. The last 15 years offer a pretty bad scenario, 2 crashes and a mortgage crisis. 6% after long term gains would get you 5.1% net.  You can pull the data back to 1871 and run CAGR numbers for the timeframe of your choosing. I haven't done it yet, but I imagine there's no 15 year span that lags the 3% target I cite.  What makes it more complex is that the investment isn't lump sum. It may not be obvious, but CAGR is a dollar invested at T=0, and returns calculated to T=final year. It would take a bit of spreadsheeting to invest the extra funds every month/year over your period of analysis.  In the end, there are still those who will choose to pay off their 4% mortgage regardless of what the numbers show. Even if the 15 year result showed worst case 3.5% (almost no profit) and an average 10%, the feeling of risk is more than many will want. First, as others have commented, the idea that getting a mortgage to buy a house is always a good idea is false.  It depends on a number of factors including the current interest rate, what you think the future interest rate will do over the life of your mortgage, the relative cost of renting vs. buying, and how long you would stay in the house that you bought. To the extent that a mortgage for a house is more often recommended than buying other goods on credit, it is for these reasons: Except for #1 above, you could and can find other situations where taking a loan makes more sense than buying in cash.  This more true if you have the resources and the skill to invest money at a rate that beats the interest rate you pay to the creditor.  The general advice not to try this rests in the fact that most people don't have the resources or the skill to actually make this pay off, especially on high-interest rate loans or over short time periods. The literal answer to your question 'what determines the price of an ETF' is 'the market'; it is whatever price a buyer is willing to pay and a seller is willing to accept. But if the market price of an ETF share deviates significantly from its NAV, the per-share market value of the securities in its portfolio, then an Authorized Participant can make an arbitrage profit by a transaction (creation or redemption) that pushes the market price toward NAV. Thus as long as the markets are operating and the APs don't vanish in a puff of smoke we can expect price will track NAV. That reduces your question to: why does NAV = market value of the holdings underlying a bond ETF share decrease when the market interest rate rises?  Let's consider an example. I'll use US Treasuries because they have very active markets, are treated as risk-free (although that can be debated), and excluding special cases like TIPS and strips are almost perfectly fungible. And I use round numbers for convenience. Let's assume the current market interest rate is 2% and 'Spindoctor 10-year Treasury Fund' opens for business with $100m invested (via APs) in 10-year T-notes with 2% coupon at par and 1m shares issued that are worth $100 each. Now assume the interest rate goes up to 3% (this is an example NOT A PREDICTION); no one wants to pay par for a 2% bond when they can get 3% elsewhere, so its value goes down to about 0.9 of par (not exactly due to the way the arithmetic works but close enough) and Spindoctor shares similarly slide to $90. At this price an investor gets slightly over 2% (coupon*face/basis) plus approximately 1% amortized capital gain (slightly less due to time value) per year so it's competitive with a 3% coupon at par.  As you say new bonds are available that pay 3%. But our fund doesn't hold them; we hold old bonds with a face value of $100m but a market value of only $90m. If we sell those bonds now and buy 3% bonds to (try to) replace them, we only get $90m par value of 3% bonds, so now our fund is paying a competitive 3% but NAV is still only $90.  At the other extreme, say we hold the 2% bonds to maturity, paying out only 2% interest but letting our NAV increase as the remaining term (duration) and thus discount of the bonds decreases -- assuming the market interest rate doesn't change again, which for 10 years is probably unrealistic (ignoring 2009-2016!). At the end of 10 years the 2% bonds are redeemed at par and our NAV is back to $100 -- but from the investor's point of view they've forgone $10 in interest they could have received from an alternative investment over those 10 years, which is effectively an additional investment, so the original share price of $90 was correct. If one wants to have a bound on the loss percentages that are acceptable, this is would be a way to enforce that. For example, suppose someone wants to have a 5% stop-loss but doesn't want this to be worse than 10% as if the stock goes down more than 10% then the sell shouldn't happen. Thus, if the stock opened in a gap down 15% one day, this triggers the stop-loss and would exit at too low of a price as the gap was quite high as I wonder how familiar are you with how much a stock's price could change that makes the prices not be as continuous as one would think. At least this would be my thinking on a volatile stock where one may want to try to limit losses if the stock does fall within a specific range. "Funds which track the same index may have different nominal prices.  From an investors point of view, this is not important.  What is important is that when the underlying index moves by a given percentage, the price of the tracking funds also move by an equal percentage.  In other words, if the S&P500 rises by 5%, then the price of those funds tracking the S&P500 will also rise by 5%.  Therefore, investing a given amount in any of the tracking funds will produce the same profit or loss, regardless of the nominal prices at which the individual funds are trading. To see this, use the ""compare"" function available on the popular online charting services. For example, in Google finance call up a chart of the S&P500 index, then use the compare textbox to enter the codes for the various ETFs tracking the S&P500.  You will see that they all track the S&P500 equally so that your relative returns will be equal from each of the tracking funds.  Any small difference in total returns will be attributable to management fees and expenses, which is why low fees are so important in passive investing." "QUICK ANSWER When it comes to fixed income assets, whether rental real estate or government bonds, it's unusual for highly-leveraged assets to yield less than the same asset unleveraged or lowly-leveraged.  This is especially so in countries where interest costs are tax deductible. If we exclude capital losses (i.e. the property sells in future at a price less than it was purchased) or net rental income that doesn't keep up with maintenance, regulatory, taxation, inflation and / or other costs, there is one primary scenario where higher leverage results in lower yields compared to lower leverage, even if rental income keeps up with non-funding costs.  This occurs when variable rate financing is used and rates substantially increase. EXPLANATION Borrowers and lenders in different countries have different mortgage rate customs.  Some are more likely to have long-term fixed rates; some prefer variable rates; and others are a hybrid, i.e. fixed for a few years and then become variable. If variable rates are used for a mortgage and the reference rates increase substantially, as they did in the US during the 1970s, the borrower can easily become ""upside-down,"" i.e. owe more on the mortgage than the property is then worth, and have mortgage service costs that exceed the net rental income.  Some of those costs aren't easy to pass along to renters, even when there are periodic lease renewals or base rent increases referencing inflation rates.  Central banks set policies for what would be the lowest short-term rates in a country that has such a bank.  Private sector rates are established broadly by supply and demand for credit and can thus diverge markedly from central bank rates. Over time, the higher finance-carrying-cost-to-net-rental-income ratio should abate as (1) rental market prices change to reflect the costs and (2) the landlord can reinvest his net rental income at a higher rate.  In the short-term though, this can result in the landlord having to ""eat"" the costs making his yield on his leveraged fixed income asset less than what he would have without leverage, even if the property was later sold at same price regardless of financing method. ========== Interestingly, and on the flip side, this is one of the quirks in finance where an accounting liability can become, at least in part, an economic asset.  If a landlord borrows at a high loan-to-value ratio for a fixed interest rate for the life of the mortgage and rates, variable and fixed, were to increase substantially, the difference between his original rate and the present rates accrues to him. If he's able to sell the property with the loan attached (which is not uncommon for commercial, industrial and sometimes municipal real estate), the buyer will be assuming a liability with a lower carrying cost than his present alternatives and will hence pay a higher price for the property than if it were unleveraged. With long-term rates in many economically advanced countries at historic lows, if a borrower today were to take a long-term fixed rate loan and rates shortly after increased substantially, he may have an instant profit in this scenario even if his property hasn't increased in value."