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If you are on the fence about variable rate mortgages, an independent research paper by Dr. Moshe Milevsky, Associate Professor of Finance at York University, could make you feel more confident that a variable rate mortgage does not necessarily mean more risk.
Canadians have heard for years that they would probably 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. But many Canadians still wonder how much they can save and whether they will actually save any money.
Summary of Milevsky's Research Findings
Dr. Milevsky reveals some compelling evidence in his study. His independent research paper is available in English only.
Examining Canadian mortgage rate data from 1950 to 2000, including the period of high inflation and interest rates in the 1980’s, Dr. Milevsky found that:
- Choosing a variable rate mortgage would have saved consumers $22,000 in interest payments over 15 years (based on a $100,000 mortgage).
- Consumers would have been better off borrowing at prime rate (variable) compared to a 5-year fixed rate 88% of the time.1
But what about the more recent interest rate environment? Dr. Milevsky discovered that from 2001 to 2004, consumers would still have come out ahead by choosing a variable rate mortgage.2
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 interest rate structure to choose for a mortgage is no different. You should not speculate on short-term interest rates, but have a better understanding that, over the long run, you are more likely to save money by choosing a prime (variable) rate mortgage.
It's also important to note that:
- Not all variable rate mortgages have monthly payments that fluctuate with interest rates.
- A closed mortgage does not allow for much flexibility in payments, so it is possible to enjoy the potential savings of a variable rate mortgage as well as the peace of mind of predictable payments.
On the other hand, Dr. Milevsky advises that with an open variable rate mortgage “you gain the additional benefit of being able to pay down your mortgage with extra cash at anytime without penalty,” so the advantages of open vs. closed should be weighed on an individual basis. Either way, the benefits of variable rate mortgages can be extremely valuable over the long run.
Talk to a Mortgage Specialist
RBC Royal Bank mortgage specialists are available to answer your questions about our variable rate mortgage solutions, 24 hours a day, 7 days a week. Speak to a mortgage specialist at any RBC Royal Bank branch or in your home or workplace.
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