Helpful Advice for Home Buyers and Owners: A short-term, floating mortgage rate is the way to go, new study concludes
Historically, consumers would have been better off with prime rate vs. 5-year
fixed and could have saved an average $22,000 on
a $100,000 mortgage.
Toronto -- A comprehensive mortgage study
that compares prime (floating) versus fixed interest
rates brings helpful advice to the thousands of
consumers who plan to purchase or refinance a home
this year – they are more likely to be better off
financing a mortgage with a short-term floating
interest rate compared to a long-term fixed rate.
The report shows the benefit of a floating strategy
and concludes that 88.6 per cent of the time,
consumers would have saved more by borrowing at
prime versus a five-year fixed rate. They also
could have saved about $22,000 in interest payments
on a $100,000 mortgage amortized over 15 years.
"The main message is quite simple,"
says Dr. Moshe Milevsky, Associate Professor of
Finance at York University's Schulich School of
Business, who completed the report for Manulife
Financial with assistance from the Individual
Finance and Insurance Decisions Centre (IFID)
at the Fields Institute for Research in Mathematical
Science. "Long-term stability has its price.
Consumers pay for mortgage stability by incurring
higher interest costs in the long run. I conclude,
given the track record through five decades, that
the odds favour floating rate interest payments
as a cheaper alternative to long-term fixed rate
financing."
"Canadians are generally conservative and
have a tendency to lock in to a fixed long-term
rate, especially when interest rates are considered
low," Dr. Milevsky said.
"Moreover, consumers have a hard time quantifying
the consequences of paying half a percentage point
more, or less, on a mortgage over long periods
of time. My advice to them is to resist the temptation
to guess where interest rates might be heading,
and go with the floating rate – provided they
can tolerate fluctuations in monthly mortgage
payments."
The Individual Finance and Insurance Decisions
(IFID) Centre is a non-profit organization housed
at the prestigious Fields Institute for Research
in Mathematical Science. The broad objectives
of The IFID Centre are to disseminate and conduct
applied research in the growing field of financial
risk management for individuals. Dr. Milevsky's
study can be found at www.the-ifid-centre.ca.
