Variable rate mortgages save money: York U study, Manulife

Home buyers and owners can save dollars: A short-term, floating mortgage rate is the way
to go, study concludes Consumers who locked in last year paid $1,500 more for the security of a closed mortgage

WATERLOO, ON, April 16 – Homeowners and buyers who carried
a floating-rate mortgage (at Prime) through the past year would have saved more than
$1,500 in interest in one year – or $130 each month – based on a $100,000 mortgage,
compared to someone who locked in at a five-year fixed rate. This reinforces the
conclusion reached in a study comparing the costs of using a fixed versus a floating mortgage rate.

The study, commissioned by Manulife Financial last year, is
even more relevant today as interest rates appear poised to rise. Authored by Dr. Moshe
Milevsky, Associate Professor of Finance at York University’s Schulich School of Business,
the study compared the cost of using prime versus five-year fixed rates to finance a
mortgage. The report shows the benefit of a floating strategy and concludes that 88.6 per
cent of the time during the past 50 years, consumers would have saved more by borrowing at
prime versus a five- year fixed rate. It calculates that on average, Canadians could have
saved about $22,000 in interest payments on a $100,000 mortgage amortized over 15 years.

“Clearly those people who heard the message last year
that floating is the way to go, and who acted on it, are pleased,” states David
Dobbin, mortgage product director at Manulife Financial. “Everyone knows it’s a good
idea to ride short-term in a decreasing interest rate environment, but the question is
‘what about when interest rates go up?'”

“Many Canadians don’t realize that it’s not just how
high rates may rise, it’s also when they rise,” added Roman Fedchyshyn, President and
CEO of Manulife Bank of Canada. “If you decide to lock in, you have to realize that
you are gambling that it will go past your rate sooner rather than later. The longer that
floating rates stay below your locked-in rate, the higher rates have to rise and the
longer they must stay there for you to just break even.”

The report found that, during the past 50 years, there were
no clear indicators when it was the right time to ‘lock in’. “The fact that rates
were going up, from what appeared to be relatively low levels, was never a signal that it
was time to lock in,” says Mr. Dobbin. “If it was, everyone would be able to
time the market and everyone would have been a winner. But that was not the case.”

The study observed that since there were no key indicators
of the “right” time to lock-in, consumers would have been better off staying
with a floating rate and nine times out of 10 they would have been right – provided they
could tolerate fluctuations in monthly mortgage payments.”

The study was sponsored by Manulife Financial, a leading
Canadian-based financial services company that introduced Manulife One, known as a
‘flexible mortgage account’, to the Canadian marketplace in October, 1999. In addition to
using variable rates to help lower interest costs, Manulife One also uses income to pay
down consumers’ total debt until they need to draw the money back out for their monthly
expenses. They have the potential to pay down their mortgage much faster and pay
considerably less in interest payments.

Dr. Milevsky’s study can be found at

About Manulife Financial

Manulife Financial is a leading Canadian-based financial services group operating in 15
countries and territories worldwide. Through its extensive network of employees, agents
and distribution partners, Manulife Financial offers clients a diverse range of financial
protection products and wealth management services. Funds under management by Manulife
Financial were Cdn$142.2 billion as at December 31, 2001.

Manulife Financial Corporation trades as ‘MFC’ on the TSE,
NYSE and PSE, and under ‘0945’ on the SEHK. Manulife Financial can be found on the
Internet at

Interest Cost Comparison – Fixed vs. Prime (floating) Rates

Rate Payment(*)
April 10, 2001 Prime (floating) 6.75% $885
5-yr fixed 7.50% $921
April 4, 2002 Prime (floating) 3.75% $727
5-yr fixed 7.30% $910
Average prime rate over the past 12 months 5.11% $797

(*) “Payment” means monthly principal and interest payment for a $100,000 mortgage
amortized over 15 years at the rate shown.


  • If someone had locked in at the 5-year fixed rate last April, they would have paid (and
    will continue to for the next 4 years) $921/month or $11,052 for the year.

  • Had they gone with floating rate, they would have started with an immediate savings of
    $36/month (approximately, using a fixed rate payment structure), but by now would be enjoying a $194/mo
    reduction in costs.

  • Over the year, as the rate declined, they would have averaged a floating rate of 5.11 per
    cent, which would have meant an averaged monthly cost of $797…or $125 less per month.

  • Therefore, through the past year, having gone floating instead of fixed, they would have
    saved approximately $1,520 in payments – plus, would have reduced their principal by roughly $780, for
    a net gain of $2,300.

  • How high does floating have to go during the next year to make up that difference? They’d
    have to pay their current rate ($921) plus $125 (plus make up for lost principal) for the next year…in
    fact, they would need to average 10.1 per cent all year. And since we know it takes time for the rate to
    go up, it would have to actually get up to 12.7 per cent gradually over the year, to even out the costs.