Sunday, March 15, 2009
Should I Stay or Should I Go?
The immortal words of The Clash ring in my ears every time I hear the Bank of Canada has cut the prime rate. (I'm sure this is exactly what Joe Strummer and the boys had in mind when they penned Combat Rock's punk anthem)
More to the point for many mortgage holders is whether now is the time to break the shackles of their fixed-rate mortgages for the low, low and lower cost of a variable-rate mortgage. In 2005, a five-year fixed rate of 5.5 per cent sounded like a pretty sweet deal, especially as compared to the 18 per cent folks were paying in the early 1980s.
Times change. With the latest BoC cut, banks are offering variable-rate mortgages for as little as 1.9 per cent.
So, is it worth breaking your existing fixed-rate to get with the variable flow? A tricky question but one that Professor Moshe Milvesky of York University might be able to help you with.
Milevsky has created an interactive mortgage savings calculator that allows you to punch in a few numbers and let you see how much you'll save by breaking one mortgage and opting for another. The math is simple, in theory. The penalty could be as straightforward as the equivalent of three months of interest at your current rate.
Increasingly, however, banks are basing the penalty on something called an Interest Rate Differential (IRD) . It's based on a hocus-pocus calculation of the spread between the actual and new rate, multiplied by the balance owing and the number of months of payments left on the mortgage term.
Milevsky got a lot of ink in 2001 with a study that showed that people who opted for variable rate mortgages came out ahead of those who chose the stability of fixed rate mortgages 88 per cent of the time. I interviewed him and was persuaded to go the variable rate route. Haven't regretted it, either.
Today's environment might be the time when locking in makes sense, he told ctv.ca