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By: Tony Wanless
The Province
April 28, 2002
and
National Post
May 4, 2002
VANCOUVER - Interest rates appear to have bottomed and
are on the way up, so thousands of homeowners
and other potential borrowers are being forced
to gamble.
Should they lock in a lower rate now or keep riding the floating-rate
market for a while longer in order to eke out a few more mortgage
savings?
Here are some things to think about:
You do not want to be a Loan Ranger when there are thousands,
maybe hundreds of thousands, of dollars involved. So get some help
from lenders.
If you do not trust them, contact a mortgage broker or a member
of the local Mortgage Brokers Association. Most are willing to help
find the lowest possible rate that fits your situation.
If anything, you can use their information to negotiate a better
deal from other lenders.
Adrian Mastracci, president of
KCM Wealth Management says, “I suggest
you do several what-if scenarios.”
When rates begin rising, most people race to lock in long term
to ensure they are getting the lowest rate.
However, studies have shown that nine times out of 10, they would
be better off sticking with the floating rate.
A study by Moshe Milevsky, a finance professor at York University's
Schulich School of Business, for Manulife financial showed that,
during the past 50 years, consumers would have saved more by borrowing
at prime versus a five-year fixed rate -- $22,000 on a $100,000
mortgage amortized over 15 years. So do your own calculations when
comparing the fixed-versus-float conundrum.
For example, if prime is 4%, and a five-year rate is 6.2%, interest
rates must rise by 2.2 percentage points for the floating-rate strategy
to equal the fixed strategy.
And, even if they do, you will have saved a considerable amount
while they were rising unless they suddenly spike by that 2.2 points,
which is not likely.
Adrian Mastracci, a financial advisor at Vancouver's KCM Wealth
Management, suggests you do several what-if scenarios.
Most lenders and brokers have calculators on their Web sites that
let you do different mortgage paydown scenarios.
Figure out what a higher, locked-in rate would do. Then calculate
what a lower, floating rate will produce.
Be sure you use what you think will be an average rate for a year
or so to accommodate hikes in prime rates.
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