Variable mortgage rates traditionally have proven to offer the best value to mortgagors. In perhaps the most in-depth study yet, Dr. Mosche Milevsky’s 2007 paper revealed the following facts:
- The average Canadian will save interest 90% of the time by taking a variable mortgage rate.
- Those who negotiate big discounts (1.5% off posted fixed rates and 0.75% off prime variable mortgage rates) save money 77% of the time by taking a variable mortgage rate.
- Variable mortgage rates on average allow Canadians to pay their mortgage off 1 year sooner.
- The premium of fixed rates over variable mortgage rates has dropped by about 7% between 2000 and 2007.
Now 5 years since the study was performed, we need to look at market conditions to determine if variable mortgage rates are still the best value. One glaring fact was that you were taking a bigger risk with a variable mortgage rate if you could negotiate a big discount on your mortgage rate (savings dropped from 90% of the time to 77% of the time). Today, one can still expect to negotiate 1.5% off of the 5 year fixed posted rate, but no discounts are typically being offered on variable mortgage rates. This creates an even bigger risk for those taking variable mortgage rates in today’s mortgage market.
Another market condition that has changed dramatically since the study time period is the premium for a fixed mortgage rate over a variable mortgage rate. Today the premium is practically non-existent in the range of 0.09% to 0.50%, making it exceedingly difficult to rationalize the risk of a variable mortgage rate for very little benefit.
With the market conditions being so different than traditional norms, one has to ask oneself if the previous results can be expected to continue. As with buying a mutual fund you need to heed the warning that past results do not guarantee future performance. This has never been more true than with today’s variable mortgage rates.