Expert’s tips on variable versus fixed mortgage
Traditionally, the most important consideration in choosing a fixed or variable mortgage has beenwhich strategywould save the most money.

Kaz Ehara, Canwest News ServiceFinance Prof. Moshe Milevsky of York University is also executive director of the Individual Finance and Insurance Decisions Centre.

But that might no longer be the case: Choosing a type of mortgage and term todaymay come down towhat makes sense for the individual homeowner rather thanwhat saves cents. “If youwere buying a house 10 years ago, fixed versus variable was the biggest decision you made,” saysMoshe Milevsky, finance professor at YorkUniversity 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.”

In 2001, Milevsky’s study of five-year rolling interest rates between 1950 and 1999 showed that 88.6 per cent of the time homeownerswould have been better off with floating or shortterm mortgages rather than five-year, fixed-ratemortgages, 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 strategywas holding up. Roughly 85 per cent of the time, youwere better off going with variable rates, rather than fixed rates,” he says.

Newhomebuyers might sleep betterwhen essentially paying an insurance premium as part of locked-in payments for five years, but saving a fewdollars should no longer be the determining factor in the fixed-variable dilemma.
“If you look at interest rates right now, you’re debating over a per cent,” he says. “When fixed rateswere nine per cent and variable rateswere five, that’s a big difference. That’s another issue.”

The flattening of the bond yield curve in recent years meant youmight pay only one or one and a half per cent more to lock in a longterm rate, and that made the stabilityof fixed rates much more attractive than it was five years earlier.

Many homeowners with variable rates belowprime 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 Milevsky, adding lowrates make other considerations more important in the fixed-variable debate.

“If you’re going to renewin a year or two, what if your housing price is lower than the value of the loan, and the bankswon’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.

One compromise may be a combination mortgage that is part-fixed and part-variable.