MORTGAGE: Fixed vs flexible

Traditionally, the most important consideration in choosing a fixed or variable mortgage has traditionally been which strategy would save the most money.

But that might no longer be the case: Choosing a type of mortgage and term today may come down to what makes sense for the individual home owner rather than what saves cents.

"If you were buying a house 10 years ago, fixed versus variable was the biggest decision you made," said Moshe Milevsky, finance professor at York University and executive director of the Individual Finance and Insurance Decisions Centre. "But now there are more important things in place. Equity prices are falling, housing prices are falling. I think there are three or four things more important than fixed versus variable now."

In 2001, Milevsky's study of five-year rolling interest rates between 1950 and 1999 showed that 88.6 per cent of the time homeowners would have been better off with floating or short-term mortgages rather than five-year, fixed-rate mortgages, saving an average of $22,000 on a $100,000 mortgage amortized over 15 years.

"The last time I looked at it, a year ago, the same strategy was holding up. Roughly ... 85 per cent of the time, you were better off going with variable rates, rather than fixed rates."

Another, lesser consideration was peace of mind: New homebuyers might sleep better when essentially paying an insurance premium as part of locking-in payments for five years.

But saving a few dollars should no longer be the determining factor in the fixed-variable dilemma. "Too much emphasis has been based on this study," said Milevsky. "It's the most-downloaded item on our website. But if you look at interest rates right now, you're debating over a [percentage point]. When fixed rates were nine per cent and variable rates were five, that's a big difference."

The flattening of the bond yield curve in recent years meant you might pay only one or 11/2 per cent more to lock in a long-term rate, and that made the stability of fixed rates much more attractive than it was five years earlier.

Under current conditions, only after you think about what house prices, your credit rating and your employment status will be down the line should you worry about where interest rates will be in one, three or five years.

Economists expect rates to remain low for a year or so, then rise two to three per cent.

(prepared by Ray Turchansky/Vancouver Province)