I recently got into a discussion with a client about whether he should go with a fixed or variable rate mortgage and I shared with him a copy of a paper that was written by Associate Professor Moshe Milevsky at Schulich School of Business in 2001. The paper is called 'Floating Your Way to Prosperity' and you can find a copy of it and other papers written by Professor Milevsky at http://www.ifid.ca/research.htm. The study incorporated movements in rates over a 50-year period and proves that 8 or 9 times out of ten you would have won out by going short term vs. long term on your mortgage. Following is a copy of the discussion...
"Thanks for the article. At first glance, although I have not read it all yet, it looks professional and seems to support our decision to go with the variable rate. Two questions pop up in mind so far (there may be probably more as I read through the article);
1) How relevant you think is this article and its conclusions considering the fact that it was published in 2001 and today we are facing a new situation in real estate (sub prime) which has an ongoing impact (and we still don't know where and when it's going to stop) of downturn in economical stability and residential house prices?
2) He bases some of his analysis on past history. I have learned in life that especially in economics past does not equal the future. What is your view as to the predictability of past events on forecasting future trends?"
My response - "His study was based on the 50 year period up to 2001. If he did the study again to include the period from 2001 up to 2008, I think that the results would not be any different. I have had a variable rate mortgage for the last six years and while I think there was a short period of time when some people locked in to a fixed rate mortgage at around 4% (a very good fixed rate), I think that for the rest of the time you would have been better off with the variable rate. As far as the subprime crisis goes, while it has had a severe impact on the U.S. economy and definitely some impact on the Canadian economy, I think that the end is in sight. It is also important to note the Canadian mortgage and real estate situation is very different than the U.S. We have steady immigration, a relatively healthy economy and low unemployment, and of course a favourable interest rate environment keeping our real estate market healthy. I should also mention that we have far more conservative lending practises in Canada."
