Monday, April 6, 2009

Variable vs Fixed Not the Only Mortgage Question

Several of Canada's big banks cut their mortgage lending rates by between .10 per cent and .20 per cent over the weekend. The trimming will certainly have some borrowers wondering if they should lock in, or renegotiate.
Mortgage guru Moshe Milevsky of York University has a bit of advice - don't be so obsessed with fractions of percentage points.
That's a new tune from Milevsky. The professor earned a lot of ink a few years back with a study that showed that between 1950 and 1999 buyers who opted for a variable-rate or short-term mortgage over a five-year, fixed-rate mortgage saved substantially 88 per cent of the time. How substantial? According to Milevsky, as much as $22,000 on a $100,000 mortgage over 15 years.
In a recent interview with Canwest, Milevsky said the strategy was still sound last time he checked, with 85 per cent of those going short saving money.
But now Milevsky says that people are too focused on the dollars and are focusing too little on the sense, pun intended. In today's market, there are "three or four things" more important than the spread in mortgage rates. There were real savings to be had when the fixed rate was nine per cent and the floating rate was five per cent.
Today, the difference can be as little as one percentage point. The mortgage guru now counsels buyers to focus more on how much they can spend, how solid their credit rating is and what their employment status likely will be in five years' time. Once those are clear, then the question of long or short might become more obvious.

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