What affects tracker rates?

EnterUserName

My 5 year fix ends shortly and I have just been offered the "in house" deals:

2yr fix at 4.49%, £999 fee

2yr tracker, base + 0.34% + £999

lifetime tracker, base + 0.84% + £999

Even with the £999 fee every 2 years, it is still cheaper than the extra 50 bips on the lifetime, on £200k.

So what drives the tracker rate? The bank is getting their margin whatever the base rate does, why would anyone pick the higher rate?

K_S

@enterusername I guess if you expect base rates to go down significantly in the next few years and then stay there for a while, then it might make sense to take the lifetime tracker. You'll pay more initially and then save further down the line, if your forecast comes true. With a 2 year tracker, there's no guarantee that one will be available at +0.34% in 2 years time.

EnterUserName said:

My 5 year fix ends shortly and I have just been offered the "in house" deals:

2yr fix at 4.49%, £999 fee

2yr tracker, base + 0.34% + £999

lifetime tracker, base + 0.84% + £999

Even with the £999 fee every 2 years, it is still cheaper than the extra 50 bips on the lifetime, on £200k.

So what drives the tracker rate? The bank is getting their margin whatever the base rate does, why would anyone pick the higher rate?

dunstonh

So what drives the tracker rate? The bank is getting their margin whatever the base rate does, why would anyone pick the higher rate?

Historically, the banks run lower margins when interest rates are higher and higher margins when they are lower.    A lifetime rate has to balance out their actuarial expectations and their commercial aims (are they looking to grow their book aggressively or do they only have £x allocated for that funding) against the funding/hedging they can obtain via the markets or their alternative funding sources.

EnterUserName

Great thank you for the explanations.

Hmm... Decisions, decisions!

I'm leaning towards the 2 year tracker at the moment but I'm waiting to see if my broker can find anything better on the open market for a lifetime one, which would be my preference.