Choosing the right mortgage
New tack stresses sense, not cents
Traditionally, the most important consideration in choosing a fixed or variable mortgage has been which strategy would save the most money.
But that might no longer be the case: Choosing a type of mortgage and term today may come down to what makes sense for the individual homeowner rather than what saves cents.
"If you were buying a house 10 years ago, fixed versus variable was the biggest decision you made," says Moshe Milevsky, finance professor at Toronto's York University and executive director of the Individual Finance and Insurance Decisions Centre. "But now there are more important things in place. Equity prices are falling, housing prices are falling. I think there are three or four things more important than fixed versus variable now."
Mr. Milevsky's 2001 study of five-year rolling interest rates from 1950 to 1999 showed that 88.6% of the time, homeowners would have been better off with floating or short-term mortgages rather than five-year, fixed-rate mortgages, saving an average of $22,000 on a $100,000 mortgage amortized over 15 years.
"The last time I looked at it, a year ago, the same strategy was holding up. Roughly ... 85% of the time, you were better off going with variable rates, rather than fixed rates."
Another, lesser consideration was peace of mind: New homebuyers might sleep better when essentially paying an insurance premium as part of locking-in payments for five years.
But saving a few dollars should no longer be the determining factor in the fixed-variable dilemma.
"Too much emphasis has been based on this study," Mr. Milevsky says. "It's the most-downloaded item on our Web site. But if you look at interest rates right now, you're debating over a per cent. When fixed rates were 9% and variable rates were 5%, that's a big difference. That's another issue."
The flattening of the bond yield curve in recent years meant you might pay only 1% or 1.5% more to lock in a long-term rate, and that made the stability of fixed rates much more attractive than it was five years earlier.
Many homeowners with variable rates below prime are now offered renewal rates above prime. Discounts can sometimes be negotiated on longer terms, and other times on variable rates.
"Renewing is not just a day at the bank, it's a major event in the life of your house," says Mr. Milevsky, adding that low rates make other considerations more important in the fixed-variable debate. "If you're going to renew in a year or two, what if your housing price is lower than the value of the loan, and the banks won't give you that again? What about locking in as long as possible? If I
get the five-year rate, they're not going to bother me.
"No. 2 is how much money is put down. If you put down only 5%, how much of an effect will that have on your credit rating? Banks are more cautious. Getting a deal might depend on whether you go fixed or variable.
"[Then] there's the question of employment. If you do not have a mortgage with flexibility, what if you can't make a payment for months?"
One compromise may be a combination mortgage that is part-fixed and part-variable.
"I'm getting to be a bigger fan than I used to be," Mr. Milevsky says. "I used to say 'diversify your assets, not your liabilities,' but if you can make the deal to lock in some of your mortgage, that might be a good thing. But that's two mortgages, with two sets of prices, and if it's an extra $200 that's one thing, but an extra $1,000 is another."