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Fixed or Variable – Important Research Update

The debate between fixed or variable rates never dies.  Thousands of mortgage planners and lenders counsel their clients on this decision every day.  In doing so, most of them rely on the landmark research of York University’s Dr. Moshe Milevsky.

Moshe-Milevsky In 2001, Dr. Milevsky made Canada reassess its fixation on fixed-rate mortgages.  He showed with statistical evidence that variable rate-mortgages saved borrowers money 88.6% of the time.  Since then, Dr. Milevsky’s research has been one of the foundations of Canadian mortgage planning.

Now, seven years later, Dr. Milevsky has issued a third and much anticipated update to his 2001 study (here is the previous update).  The results were published recently on Advisor.ca, in a story entitled Moving Mortgages.

Among other things, Dr. Milevsky’s newest findings reaffirm his 2001 conclusion that, “over the long run, homeowners really do pay extra for fixed-rate mortgages.”

The following is a list of the other key take-aways from Dr. Milevsky’s latest article:

  • Based on data from 1950 to 2007, the average Canadian could expect to save interest 90.1% of the time by choosing a variable-rate mortgage instead of a fixed.  The average savings was $20,630 over 15 years per $100,000 borrowed.  (The assumptions used are described in the story.)
  • Those who can negotiate big discounts (e.g.  1.5% off posted fixed rates and 0.75% off prime variable rates) save money 77.1% of the time by going variable.
  • Variable mortgages typically let people shave over a year off their amortization.
  • Despite the above, Dr. Milevsky feels there is no “one-size-fits-all solution” to choosing a fixed or variable rate.  He says it depends mainly one’s risk tolerance.
  • The premium of fixed rates over variable rates has declined about 7% in the last seven years
  • Predicting long-term interest rates is virtually impossible.  Dr. Milevsky feels that “even Bank of Canada governor Mark Carney is unlikely to possess” this skill.
  • Milevsky reminds readers that being able to predict short-term interest rates “does not necessarily generate better odds over time.”
  • Here’s a stunner.  Statistically speaking, even people who can accurately predict rate direction one year out cannot beat the performance of variable rates Milevsky says.  He therefore urges homeowners to “avoid the temptation to outguess the Bank of Canada or the billion-dollar bond market.”
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Last modified: April 3, 2016

Robert McLister is one of Canada’s best-known mortgage experts. A mortgage columnist for The Globe and Mail, interest rate analyst and editor of MortgageLogic.news, Rob has been covering Canada's mortgage market since 2007.