Mortgages - Fixed Vs. Floating
What’s the most effective way for your clients to finance their mortgages? Back in 2001, that very question prompted me to conduct an analysis that confirmed and documented that savings accrue to people who are willing to accept risk and finance a mortgage with a floating - or variable-rate loan.The IFID Centre’s original research from that year proved our hypothesis and now, with the addition of six more years of data, we’re able to reaffirm that over the long run, homeowners (your clients) really do pay extra for fixed-rate mortgages. And, while the so-called premium for predictability has declined somewhat during the past five years as the yield curve has flattened, it remains an implicit opportunity cost for homebuyers who are averse to risk.
We also found short-term prophecy doesn’t pay in the mortgage market. Even Canadians who can accurately predict the next move of the Bank of Canada, and lock in a mortgage just as the short rate is about to increase, are worse off on average compared with those who float over the entire interest-rate cycle. This is because properly timing the mortgage market requires an ability to predict movements of both short- and long-term points on the yield curve, a skill even Bank of Canada governor Mark Carney is unlikely to possess.
Article (c) 2008Â www.advisor.ca
Moshe A. Milevsky, associate professor of finance,
Schulich School of Business, York University, and executive director, IFID Centre;
& Brandon Walker, junior research associate, IFID Centre.
Originally Published 02/08Â www.advisor.ca
Used by Permission
