What it means
Think of your adjustable rate as two parts stacked together: an index the lender cannot influence and a margin the lender sets. The margin is the lender's compensation for credit risk, servicing costs and profit, which is why borrowers with stronger credit files are usually offered smaller ones.
Because the margin never changes, it is the single most durable part of your mortgage pricing. A quarter-point difference in margin looks trivial at signing but applies to every adjustment period for the remaining twenty or twenty-five years of the loan.
Typical margins on residential adjustable rate mortgages sit somewhere between about 2% and 3%, though the range widens for borrowers with weaker credit or unusual properties. Commercial loans use the same structure with margins that reflect the specific asset and sponsor.
The margin is also where teaser pricing hides. A lender can advertise a very low introductory rate and still earn well over the loan's life if the margin is high, so the fully indexed rate is a far better comparison point than the headline number.
Margins are more negotiable than most borrowers assume, particularly for well-qualified applicants or those bringing a larger deposit. Asking two lenders for their margin, in writing, alongside the index they use is the quickest way to compare adjustable rate offers on a like-for-like basis.
In practice
Real-world examples.
Example
A couple with a credit score in the top tier negotiate their margin down from 2.75% to 2.375% by moving their current account and savings to the same lender. On their $520,000 loan that saves close to $1,950 a year once the fixed period ends.
Example
A property investor buying a four-unit rental building is quoted a margin of 3.25%, a full point above the owner-occupier rate, because the lender prices investment property as higher risk. He accepts it but shortens the fixed period to keep the option of refinancing sooner.
Example
A mortgage broker builds a comparison sheet showing three offers at the same starting rate but margins of 2.25%, 2.60% and 3.10%. Presenting the fully indexed rate instead of the teaser rate changes the client's choice entirely.
Formula
Calculation
Fully indexed rate = index value + margin. Extra annual interest from a higher margin = loan balance x margin difference.
Two lenders quote on the same $400,000 loan and both use an index currently published at 4.25%. Lender A offers a margin of 2.25%, giving a fully indexed rate of 4.25% + 2.25% = 6.50%. Lender B offers a margin of 3.00%, giving 4.25% + 3.00% = 7.25%.
The margin difference is 3.00% - 2.25% = 0.75 percentage points. On the $400,000 balance that is $400,000 x 0.75% = $3,000 of extra interest a year, or $3,000 / 12 = $250 a month.
Both lenders were advertising the same 4.99% introductory rate for the first three years, so the headline pricing was identical. Over a decade at similar balances the margin difference is worth roughly $30,000, which is the sort of number that should decide the choice rather than the teaser rate.Case study
Seen in the real world.
Northgate Timber Works is a fictional family business used purely as an illustrative case. In the story its owners refinanced a $1.2 million loan on their workshop and warehouse, comparing three adjustable rate offers that all opened at 5.10% for two years.
The finance manager asked each lender for the index name and the margin in writing. The offers came back at margins of 2.40%, 2.90% and 3.35%, all against the same published index, meaning the cheapest and dearest deals were nearly a full percentage point apart once the introductory period ended.
Choosing the 2.40% margin saved an illustrative $11,400 a year in interest against the highest offer at the then-current index level. The wider lesson in this fictional example is simple: the number that determines what a family business pays for most of a loan's life is rarely the one printed in the advertisement.
Watch out
Common mistakes.
- Shopping on the introductory rate and ignoring the margin. The teaser lasts a few years while the margin applies for the remaining decades of the loan.
- Assuming the margin changes when market rates change. It is fixed at signing, and only the index moves.
- Believing the margin cannot be negotiated. Well-qualified borrowers regularly obtain a quarter to a half point reduction simply by asking and by comparing written offers.
Questions
People also ask.
How do I find the margin on my existing loan?
It is stated in the note and the adjustable rate rider, and your servicer must tell you if you ask.
Does a lower margin always mean a better deal?
Not always, because a lender may pair a low margin with higher upfront fees or a less favourable index, so compare the whole package.
What is a fully indexed rate?
It is the index value plus your margin, which is the rate you would pay today if the introductory period had already ended.
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