The Variable Rate Advantage

If you are on the fence about variable rate mortgages, an independent research paper¹ by Dr. Moshe Milevsky, Associate Professor of Finance at York University, could help you feel more confident that a variable rate mortgage does not necessarily mean more risk.

Would Canadians be better off over the long run if they financed their mortgage with a short-term variable rate instead of a long-term fixed rate? Many Canadians still wonder whether they will actually save any money and if yes, how much they can save.

Summary of Milevsky's 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

Consider your home as if it is a long term investment. Investments increase and decrease in value periodically, but generally increase over the long haul. As a result, most consumers are prepared to invest for the long term, knowing that the investments will likely rise in value.

Determining which type of interest rate to choose for a mortgage is no different. Based on Dr. Milevsky’s research you are more likely to save money by choosing a prime (variable) rate mortgage than by speculating on short-term interest rates.

The evidence from Dr. Milevsky’s paper is compelling - a variable mortgage will save you money. But, the choice of whether to go with a variable rate mortgage really depends on your tolerance for risk, as well as your current and long term goals.

Talk to a Mortgage Specialist

Your RBC Royal Bank^® mobile mortgage specialists can help you decide if a variable rate mortgage option best fits your situation and risk tolerance. They are available to meet with you to answer your questions, at a time and place most convenient for you, including any RBC Royal Bank branch or in your home or workplace.

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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.