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Helpful Advice for Home Buyers and Owners: A short-term, floating mortgage rate is the way to go, new study concludes Historically, consumers would have been better off with prime rate vs. 5-year fixed and could have saved an average $22,000 on a $100,000 mortgage Toronto -- A comprehensive mortgage study that compares prime (floating) versus fixed interest rates brings helpful advice to the thousands of consumers who plan to purchase or refinance a home this year – they are more likely to be better off financing a mortgage with a short-term floating interest rate compared to a long-term fixed rate. The report shows the benefit of a floating strategy and concludes that 88.6 per cent of the time, consumers would have saved more by borrowing at prime versus a five-year fixed rate. They also could have saved about $22,000 in interest payments on a $100,000 mortgage amortized over 15 years. “The main message is quite simple,” says Dr. Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business, who completed the report for Manulife Financial with assistance from the Individual Finance and Insurance Decisions Centre (IFID) at the Fields Institute for Research in Mathematical Science. “Long-term stability has its price. Consumers pay for mortgage stability by incurring higher interest costs in the long run. I conclude, given the track record through five decades, that the odds favour floating rate interest payments as a cheaper alternative to long-term fixed rate financing.” “Canadians are generally conservative and have a tendency to lock in to a fixed long-term rate, especially when interest rates are considered low,” Dr. Milevsky said. “Moreover, consumers have a hard time quantifying the consequences of paying half a percentage point more, or less, on a mortgage over long periods of time. My advice to them is to resist the temptation to guess where interest rates might be heading, and go with the floating rate – provided they can 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. Unlike a traditional mortgage, Manulife One 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. “Recent surveys show that Canadians are looking for ways to save money and this is invaluable advice as we enter the mortgage season,” says Bob Tillmann, Vice President, Manulife One. “Whether consumers are refinancing their mortgage, upgrading or buying a home, Dr. Milevsky’s study should help them consider a key decision that could save them thousands of dollars. What’s even more exciting is how – separate from Dr. Milevsky’s proven benefit of a floating rate -- Manulife One can help Canadians reduce their debts even faster and save tens of thousands of dollars in interest payments.” The Individual Finance and Insurance Decisions (IFID) Centre is a non-profit organization housed at the prestigious Fields Institute for Research in Mathematical Science. The broad objectives of The IFID Centre are to disseminate and conduct applied research in the growing field of financial risk management for individuals. Dr. Milevsky’s study can be found at www.the-ifid-centre.ca. Manulife Financial is a leading Canadian-based financial services company 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 (Manulife Financial Corporation and its affiliated companies) were Cdn$123.5 billion as at December 31, 2000. Manulife Financial Corporation trades as ‘MFC’ on the TSE, NYSE and PSE, and under ‘945’ on the SEHK. Manulife Financial can be found on the Internet at www.manulife.com. - 30 - For more information, please contact:Tom Nunn Director of Media Relations Manulife Financial 519-747-7000 Ext 8578 tom_nunn@manulife.com |
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