Fixed or Variable? Updated Perspectives

Moshe-Milevsky When deciding between a fixed or variable rate, people often turn to the most quoted research on the topic: that done by Dr. Moshe Milevsky.

Dr. Milevsky found that 77%-90% of the time people pay less interest over the long-run by choosing a variable-rate mortgage.  (See CMT’s April 2008 story entitled Fixed or Variable Mortgages – Research Update)

But today is a new day.  A lot of people think things are “different this time.”  So we took the opportunity to speak with Dr. Milevsky for a current view of his previous findings.  It was a highly informative and reinforcing discussion that we’d like to share here.


On How Today’s Economy and Market Impacts His Research

  • "An environment like we're seeing today brings into question any type of historical study," says Dr. Milevsky.
  • He notes that several things have changed since his original report in 2001:
    • The original study used prime rate as the proxy for variable rates. However, “You cannot get prime today,” he says. “The premium (of fixed rates over variable rates) has disappeared. That makes a difference.” 
    • Naturally, as the differential between fixed and variable rates decreases, the odds of a borrower doing better in a fixed rate increases.
    • Falling home prices, reduced availability of credit, and employment instability also add material risks to the equation.  Today’s mortgagors must consider these added risks carefully when evaluating a variable rate.  Dr. Milevsky believes this applies especially to those with small down payments, like 5%.

On The Effect of Historically Low Interest Rates

  • A lot of people think rates can’t go much lower. However, Dr. Milevsky suggests considering this as a possibility nonetheless.  "Look,” he says. “I never would have said this three years ago, but prime is at 3%. Why can't it go to 1%?"
  • Realistically, however, the odds of rates falling much further have declined, he says.
  • On the other hand, Dr. Milevsky has never strayed from one central tenet.  "It’s not about speculating where interest rates are going,” he believes.  “It’s about risk management.”
  • “In the original study we never said that floating your mortgage is better 100% of the time." There have been “periods of inversion” where fixed rates were actually lower than variable rates.  Indeed, the original study found that 10-12% of the time it pays to be in a fixed rate, “and this might be one of them" he says.
  • Notwithstanding the above, Dr. Milevsky still maintains that "over long periods of time the odds favor a variable.”

On: Comparing Short and Long Mortgage Terms

  • When comparing a short term (like a 1-year or 3-year) to a longer term (like a 5-year), Dr. Milevsky says calculating the “break-even rate” provides a helpful metric.
  • The break-even rate is the hypothetical interest rate whereby a borrower will be “indifferent” between a shorter and a longer mortgage term.
  • For example, if one is comparing a 3-year mortgage to a 5-year mortgage, Dr. Milevsky asks: “What is the number in 3 years that will make me regret not having gone with the 5 year?"
  • To put it another way, think of two individuals:
    • One locking into a 5-year fixed
    • One locking into a 3-year fixed, followed by a 2-year fixed.

You can create an amortization schedule for each scenario, he says, and then solve for the interest rate that would make the total interest paid equivalent in each case.  That is the “break-even rate.”  If you feel interest rates will be above the break-even rate in three years, then it may make sense to consider the 5-year fixed instead.

On What to Look for in a Mortgage Today

  • “As we’ve said before, people should strongly consider mortgages that are part fixed and part floating,” says Dr. Milevsky. Such mortgages are called hybrids, and they’re designed to offer interest-rate diversification. Diversification benefits borrowers just like it benefits investors who buy portfolios of stocks.
  • Also worth considering are “all-in-one” accounts, which roll your mortgage and other debts into one low-rate loan.  Dr. Milevsky says the benefits of these accounts “compound over time” and are “larger than you’d expect.” He did a study in 2005 that supports this. Here is the link.
  • The market’s current 3-year fixed-rate promotions might also have merit.  “If someone is looking at getting a 3-year fixed there is no way I can say to someone don't lock in for 3 years, especially if they have a high ratio mortgage.” With a rate of 3.75%, 3-year fixed rates are actually below most variable-rate mortgages.
  • In general, “if you have a lot of assets, I would go with the lowest possible rate,” he says. That’s true whether it’s a fixed rate or a variable rate.
  • However, folks with a small amount of equity (like many first-time homebuyers), or those with low or unstable income, should focus on “locking in at a low fixed rate.”


Dr. Milevsky is an Associate Professor of Finance at York University’s Schulich School of Business, Executive Director of The Individual Finance and Insurance Decisions Centre, and author of the mortgage industry’s preeminent research on fixed and variable interest rates.

  1. Hi CMT – Funny enough I was just wondering the other day how I should be intepreting Professor Milevsky’s study in this environment. What a timely article! Well done.

  2. Great article, thanks. Personally I’m looking to possibly lock in a portion of my Manulife One. This may be that 10% time where fixed pays.

  3. Kudos from Calgary on a fantastic post.
    I would agree that variables just aren’t that appealing anymore. Even if interest rates do go down this spring it may be short lived!

  4. Dr. Milevsky needs to update some reports about markets as well. Like Manulife Income Plus, which uses his talk about postive and negative returns and retirement. His reports I beleive do not factor this market latest downturn. Which changes outcomes again.
    The key is what happened in the past, may or may not happen in the future.

  5. Tu, are you sure you want to go from 2.15% interest rates to ~4.19% (if you can even get that from your lender)? Also, remember that the rate might drop again and you might be getting less than 2% rate? I think it really is your decision. Nobody can tell you want to do; however, I think it will be a WIN WIN. My opinion is you win more with 2.15% rate though ;)

  6. Statistically, retrospective analyses over extended periods prove that the VARIABLE rate 5year product is SUPERIOR to the FIXED rate 5year product: this is unequivocal by all objective measures by reputable statisticians: PERIOD !!
    Oliver Teekah, M.A. (Clinical Psychology}
    Real Estate Broker
    Mortgage Broker
    Real Estate amd Mortgage Coach

  7. I read the article and my impression is that fixed is this time is better then variable. But I was interested in the Variable rate since all Odds are Rates will go higher as it can not drop more then what it is now but I am a first time home buyer and I fall into the category of only having 5% and a small amount of equity like Dr. Milevsky mentioned o here I bring you what to do? since according to him this category should fall into the fixed rate even though the different between fixed and variable is still a considerable amount when comes to living in a monthly basis. Fixed 4.15% Variable 2.95%.

  8. Matheus, I think you have to look at getting a 5 year fixed that is close to the variable rate. Also, I would say that 2.95 variable rate is temporary (even if it is max for one year). The slightest movement upward on the variable makes it right on or within a hair of today’s 5 year fixed competitive rate.
    I listened to the argument that the banks make money off of the fixed rate premium as it is insurance against the unlikely event of higher rates. But this doesn’t make sense if the bank cost on a variable mortgage is tied to the Bank of Canada rate but the bank cost on a fixed mortgage is tied to the BOND MARKET. Read the information here in the “Turning Point” article.
    These are very unsual times and I would strongly suggest someone like you to go get yourself a very competitive fixed 5 year rate ASAP. I haven’t seen anyone reference a time in Canadian history where you could get a 5 year fixed for what you can today (curious actually if someone could tell us).
    I had TD give me 3.69 5 year with a little haggling and you can easily check out where 3.59 is advertised.

  9. Good advice. I’d just add to watch out for those 3.59% 5 yr rates. They all have restrictions on prepayments.

  10. Just came from TD this afternoon and was told that they were surprised that their “margin” or “discretion” went up today on the 5 year fixed. I notice has someone now with 3.54 down from their 3.59 (JK makes a point about restrictions above on rates at this level). I had 3.69 before today’s news so expect to get 3.64 on final signing.
    The person at TD commented that she has been following the bond market (edging up) and doesn’t understand why the discretion went up. She said perahps the BOC is intervening some how to keep the long term rates low for now.

  11. ok folks, today is feb 25 2010
    …. and as I advised for over 2 years now….. the VARIABLE rate mortgage has proven to be the best product for anyone anyone !
    U can even get a variable rate as low as 1.85% for 5 year term, tied to prime of cource

  12. “the VARIABLE rate mortgage has proven to be the best product for anyone anyone !”
    As long as rates don’t move up driving the borrower into default.
    In other news, having driven for 18 years now and having never had an accident, I have wasted approximately $25,000 in insurance premiums.
    I’m such a sucker

  13. speaking of car loans, I have many client considering the use of a line of credit to purchase a new vehicle. Although variable credit line rates are slightly different for each consumer based on cri/risk The average I hear about is 3.25%. Now the fixed rates I am hearing about ar 5.99% for 84 months. Off the top of my mind I would suggest the fixed rate because of the added benefit that dealerships offer great incentives to the consumer when they buy through them with a standard rate (5.995) for example a local dealership drops msrp by $7500-$9000, where as a special such as 0%,1.9%,3.09% offers no discount incentive.
    in summary my question is for longer terms higher end vehicle purchases should my clients be using a variable rate?

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