Variable mortgage is better deal, study finds
Majority believe a low fixed rate is best

Eric Beauchesne
CanWest News Service

March 4, 2004

OTTAWA -- Most Canadians want to lock in today's low mortgage rates but doing so could cost them, says a major bank. In fact, locking in could cost them dearly, a separate study suggests.

The vast majority of homeowners and potential homebuyers think mortgage rates have gone as low as they are going and feel the best strategy is to lock into a fixed term, poll results released by CIBC Wednesday suggest.

The bank, however, warns they may be making a mistake.

"In our experience, homeowners save more over the long term with a variable-rate mortgage," said Paul Mims, vice president, mortgages and lending at CIBC. "So the security of a fixed rate is not always the best way to reduce the cost of financing your home."

But with interest rates, including mortgage rates, now close to their lowest levels in more than 40 years and close to the lowest levels many Canadians have ever witnessed, 82 per cent feel they won't be going lower, the poll results suggest.

Roughly one third suspect rates will be higher a year from now and just under half expect they will be the same, according to the poll by Decima Research for CIBC of 1,267 adults last month, which is considered accurate with 2.8 points 19 times out of 20. Only seven per cent expect mortgage rates will be lower a year from now.

On the surface, it's not surprising then it also found 64 per cent believe the best mortgage strategy is to lock into a fixed rate and only 29 per cent would go for a variable-rate mortgage.

However, Mims in an interview noted the rate on a fixed-rate mortgage is significantly higher than on a variable-rate mortgage.

The posted rate for a five-year fixed rate at CIBC is 5.8 per cent, while its variable-rate mortgages can be had for less than the four per cent prime rate, he said. Further, homeowners can always switch their variable-rate mortgage to a fixed rate at any time without penalty.

And rates aren't going to soar unless inflation does first, he added, noting the outlook for inflation is that it will remain low.

But don't take the bank's word for it that floating is better than fixed. A study by a York University professor in 2001 came to the same conclusion.

"Canadian consumers are better off, on average, financing a mortgage with a short-term floating prime interest rate compared to a long-term fixed rate," concluded the 2001 study by Moshe Milevsky, of the university's Schulich School of Business.

The study, covering the period from 1950 to 2000, found Canadians would have saved a whopping $22,000 in interest payments on a $100,000 mortgage amortized over 15 years by borrowing at prime rather than the five-year rate.

The odds of doing better by going for a variable rather than a fixed rate ranged from 75 per cent to 90 per cent, it said.

CIBC said there's evidence more Canadians are also starting to realize that they'll likely do better with a floating-rate mortgage.

"Traditionally, people tend to lock into fixed-rate mortgages when rates are low to protect themselves against a potential interest rate hike," noted Jeannie Stamkos, a branch manager at CIBC. "But at CIBC, we've seen a trend towards variable rate mortgages in recent years."
The survey found the preference for a variable-term mortgage is highest among immigrants, at 40 per cent, and in households with an income of more than $100,000, at 37 per cent.

Meanwhile, the poll results also suggest more than two thirds of Canadians think now is a good time to buy a home.

"These people are likely even more positive now that the Bank of Canada further reduced interest rates by a quarter percentage point," Mims said.

Only 23 per cent disagreed that now is a good time to buy a home.

© The Vancouver Sun 2004