Mortgage Security not That Costly

Tuesday, September 21st, 2010 at 12:34 pm  
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Forget everything you thought you knew about the benefits of taking a variable-rate mortgage instead of locking in for the long term.

A new study suggests the security of a five-year mortgage costs little or nothing beyond a riskier variable-rate mortgage, providing you get a jumbo-sized rate discount.

“Interest costs on discounted closed five-year mortgages have been close to, and often lower than, those of variable-rate mortgages since late 1996,” senior Canada Mortgage and Housing Corp. economist Ali Manouchehri writes in the study.

Homeowners have made variable-rate mortgages hugely popular in the past few years in the belief that you can save on interest costs by pegging your mortgage rate to your lender’s prime lending rate. As the prime rises, or as has generally happened in the past few years, fallen, so goes your mortgage rate.

The prime rate at the major banks is now 4.5 per cent, while the posted five-year rate at the big banks is 6.15 per cent. In just one year, the variable-rate choice would save you about ,700 on monthly payments toward a 0,000 mortgage amortized over 25 years (assuming a level prime rate).

Historically, you would also have saved a lot. The CMHC study shows that five-year mortgages taken out from 1993 through 1998 would have cost anywhere from ,000 to ,000 in additional interest paid over the term of the loan (the example is based on a 0,000 mortgage amortized over 25 years).

The flaw with this analysis is that it doesn’t reflect real-world mortgage pricing. These days, very few people take out a mortgage without a sizable discount off the posted rates at major banks.

For that reason, the CMHC’s Mr. Manouchehri decided to compare discounted five-year mortgages with discounted variable-rate mortgages. Incidentally, five years is the most popular term by far for fixed-rate mortgages at about 59 per cent of the total.

The size of the discounts Mr. Manouchehri applied was based on the difference between posted major bank rates and the best deals available from other lenders. For five-year mortgages, he used a discount of 1.25 of a percentage point; for variable-rate mortgages, it was 0.4 of a point off prime.

For five-year mortgages taken out between 1993 and mid-1996, the five-year mortgage was costlier in terms of interest costs. Since then, however, variable-rate mortgages have generally been a little bit more expensive.

Obviously, there’s nothing in this study that decides the fixed-rate versus variable-rate debate once and for all.

In fact, the CMHC study may just confuse anyone who recalls some research done for Manulife Financial back in 2000 by York University finance professor Moshe Milevsky. His research found that the extra interest charged on a five-year mortgage would have cost ,000 on average between 1950 and 2000 for a 0,000 mortgage amortized over 15 years.

To make some sense of the variable-rate versus five-year question, let’s go back to the CMHC study.

It shows that five-year mortgages, discounted or otherwise, were especially bad choices for a three-year period starting in mid-1993. Rates were high for a while back then, but they subsequently fell.

You were a spectator to these rate declines if you were stuck in a five-year mortgage, while people in variable-rate mortgages would have benefited almost immediately.

It’s a different world now, though. Five-year mortgage rates are close to a 50-year low, which suggests they’re far more likely to rise over their term than fall.

So what’s the best choice here, variable-rate or five-year fixed rate? People who want to pay rock-bottom mortgage rates for as long as possible will probably still want a variable-rate mortgage. Remember, you can lock this sort of mortgage into a fixed term without penalty in most cases.

The case for the five-year term looks almost as strong, though. First, the CMHC study tells us there may not be a significant cost to locking your mortgage in for five years, and you might even save a little over a variable-rate mortgage.

Second, the likelihood of higher rates in the years to come would suggest that this is a good time to lock in.

If you had a variable-rate mortgage discounted to 4 per cent, the prime would have to go up by 0.85 of a percentage point to equal the current five-year rate. That’s not a lot of ground to cover in the span of 12 to 18 months when the economy is doing well.

Arguably, the variable-rate versus fixed-rate debate is all about risks and rewards. Right now, the five-year option offers much less risk, and almost as much reward.

Mortgage Security is Very Important

Wednesday, February 4th, 2009 at 11:56 pm  
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Forget everything you thought you knew about the benefits of having a variable rate mortgage instead of locking in the long run.

A new study suggests the safety of a period of five years of mortgage costs little or nothing beyond a riskier variable rate mortgage, which allows for a jumbo-sized rate discount.

Interest discounted closing costs of mortgages five years have been close to and often lower than variable-rate mortgages since late 1996, “senior Canada Mortgage and Housing Corp. economist Ali Manouchehri writes in the study.

owners have variable rate mortgages popular in recent years in the belief that they can save on interest costs for fixed rate mortgage your lender Main type loan. It stands as the primary or as often happened in recent years has fallen, so goes your mortgage rate. The first type

in major banks is now 4.5 percent, while the posted rate for the five big banks is 6.15 percent. In just one year, the variable rate option that would save about $ 1700 in monthly payments of $ 150,000 mortgage amortized over 25 years (assuming a first-rate level).

Historically, you have also saved a lot. The study shows that five years of CMHC mortgages contracted between 1993 and 1998 would have cost from $ 50,000 to $ 5000 in additional interest paid during the term of the loan (the example is based on a $ 100,000 mortgage amortized over of 25 years).

error with this analysis is that it does not reflect the real world price of mortgages. These days, few people take a mortgage without a substantial discount on published rates at major banks.

For that reason, the CMHC’s Mr. Manouchehri decided to compare discounted five-year mortgages with discounted variable mortgage rates. Indeed, five years is the most popular term by far for fixed-rate mortgages by around 59 per cent of the total.

The size of the discounts Mr. Manouchehri applied is based on the difference between posted major bank rates and the best deals available from other lenders. During five years the mortgages, he used a discount of 1.25 percentage point, to variable-rate mortgages was 0.4 of a point off prime. During five years

mortgages contracted between 1993 and mid 1996, five years of the mortgage was costly in terms of interest costs. Since then, however, the variable-rate mortgages generally have a bit more expensive.

Obviously, nothing in this study to choose a fixed rate versus variable-rate debate once and for all.

In fact, the CMHC study may just confuse anyone who recalls some research conducted by Manulife Financial in 2000 by University professor Moshe Milevsky of York finance. His research found that the additional interest charged on a five-year mortgage will cost $ 20,000 on average between 1950 and 2000 by a $ 100,000 mortgage amortized over 15 years.

To make some sense of the variable rate for five years compared to the question, let’s go back to the CMHC study. This shows that

mortgages five years, discounted or otherwise, are particularly poor choices for a period of three years from mid-1993. Rates were high for a while then, but later fell.

were a spectator to these rate declines if you were in a period of five years of a mortgage, while people in variable-rate mortgages have benefited almost immediately .

It’sa different world now, however. In five years mortgage rates are near a 50-year low, suggesting that they are much more likely to increase over the autumn term.

So what is the best choice here, variable-rate or five years fixed rate? People who want to pay rock bottom mortgage rates for as long as possible, probably still want a variable rate mortgage. Remember, you can block this type of mortgage on a fixed term without penalty in most cases.

for five years which is almost as strong, however. First, the CMHC study tells us that can not be a significant cost to locking your mortgage in five years, and can save a little more than a variable rate mortgage.

Secondly, the likelihood of higher rates in coming years suggests that this is a good time to lock in

If I had a variable rate mortgage discount to 4 percent, the first would have to go by 0.85 of a percentage point to equal the current rate of five years. That’s not a lot of ground to cover in the span of 12 to 18 months when the economy is doing well.

Arguably, the variable rate fixed rate against the discussion of all the risks and rewards. At this time, the option of five years offers much less risk, and almost as much as the reward.