Better off with Variable Mortgage

The average mortgage borrowers believe fixed low mortgage interest rates over a long time is better but it is very costly. Studies suggest, locking in cost more. The vast majority of homeowners and potential homebuyers think mortgage rates have gone as low as they are going and feel the best strategy is to lock into a fixed term. According to York University, Schulich School of Business professor, Moshe Milevsky in 2001 "Consumers are better off, on average, financing a mortgage with a short-term floating prime interest rate compared to a long-term fixed rate," The study, covering the period from 1950 to 2000, found Canadians would have saved a whopping $22,000 in interest payments on a $100,000 mortgage amortized over 15 years by borrowing at prime rather than the five-year rate.

Paul Mims, vice president, mortgages and lending at CIBC agrees with the study saying, “Homeowners save more over the long term with a variable-rate mortgage," So the security of a fixed rate is not always the best way to reduce the cost of financing your home.

Facts:

× Interest rates, including mortgage rates, are now at their lowest levels in more than 40 years and close to the lowest levels many have ever witnessed, 82 per cent feel they won't be going lower, the poll results suggest.

× Roughly one third suspect rates will be higher a year from now and just under half expect they will be the same, according to the poll by Decima Research of 1,267 adults, which is considered accurate with 2.8 points 19 times out of 20. Only seven per cent expect mortgage rates will be lower a year from now.

× 64 per cent believe the best mortgage strategy is to lock into a fixed rate and only 29 per cent would go for a variable-rate mortgage.

× The rate on a fixed-rate mortgage is significantly higher than on a variable-rate mortgage. If the posted rate for a five-year fixed rate is 4.2 per cent, while its variable-rate mortgages can be had for less than the 2.5 per cent prime rate.

Further, homeowners can always switch their variable-rate mortgage to a fixed rate at any time without penalty. And rates aren't going to soar unless inflation does first. Considering the trillions of dollars the government have pumped into the economy of the world, inflation is sure to come, so variable mortgage holders should watch out for it. The odds of doing better by going for a variable rather than a fixed rate ranged from 75 per cent to 90 per cent.