Variable vs. Fixed Rate Mortgages
So you’ve found your dream home or it’s time to renegotiate. The big question is whether to go with a Fixed versus Variable mortgage. It really all comes down to each owners personal situation. As Spring is all about informing it’s clients we want to reference an independent study into the question:
Summary of Research Findings
Dr. Milevsky’s research paper reveals some compelling evidence. His recently updated study, which examines Canadian mortgage interest rates data from 1950 to 2007, finds that:
- Choosing a variable rate mortgage would have saved consumers $20,000 in interest payments over 15 years (based on a $100,000 mortgage)(1).
- Consumers would have been better off borrowing at prime rate (variable) compared to a 5-year fixed rate 89% of the time(1).
As a Toronto home owner the most striking statistic from this study is that it’s based on a $100,000 mortgage for 15 years! With a Toronto home closing in on the $400,00 average it’s more realistic for Toronto new home buyers to look at saving $130,000 in interest over a 25 year mortgage. As home owner with a variable rate mortgage since 2007 I would certainly expect that an update of this study from 2007 to today would only reinforce that variable rates over time are proven to save money on average over the long term. There are the 10% of people who guess right and lock in rates before rate increases however this guessing game likely catches up with home owners over the long run.
The primary reason a homeowner may benefit from a fixed rate mortgage is to define the expense over the term of the mortgage. Many first time home owners run tight budgets with little room for interest rate price fluctuations. With a variable rate mortgage the risk is borne by the home owner as the bank’s cut is defined (prime minus .9 for example). With a fixed rate mortgage the bank must price the risk of interest volatility into the model leading to higher rates.
It’s important to acknowledge that when looking at historical data it’s not always a perfect predictor of future behavior. We’ve been in a state of historically low interest rates for a few years and the Fed just stated they don’t expect rates to increase until at least mid 2103. This will lower the chance of the Bank of Canada raising interest rates for the next couple years.
If it’s time to negotiate a mortgage contact Spring Realty as we can put you in contact with a Mortgage Broker who can help you get approved and fight for you to get the best rate possible.
1 - Mortgage Financing 2007: What Now? “(M.A. Milevsky and B. Walker) September 2007″. Please note that Dr. Milevsky’s full research paper is available in English only.