What the experts say

Choosing fixed vs. variable interest rates

The choice of whether or not to lock in mortgage debt will depend on your individual circumstances and risk tolerance. Because of this, Manulife One allows you to structure your debt with a combination of fixed and variable rates to meet your individual needs.

Should you lock-in your mortgage rate? While there is no “right” answer to this question, a 2007 study ¹ looked at the financial impact of choosing fixed vs. variable mortgage rates and trying to “time the market” by locking in when it appears that interest rates will rise in the near term.

Here are some of the study’s conclusions:

On choosing the “right time” to lock in

“…short term prophecy doesn’t pay in the mortgage market. Canadians who can accurately predict the behavior of the Bank of Canada – and decide to “lock in” their mortgage when the short rate is about to increase – are worse off on average, compared to those who float over the entire interest rate cycle… We continue to urge individual Canadians to avoid the temptation to outguess the Bank of Canada or the billion dollar bond market.”

On the historical financial outcome of choosing fixed vs. variable rates

“…you were better off 89.9% of the time if you had gone with a floating rate mortgage instead of the traditional 5-year fixed rate mortgage. The average magnitude of the Maturity Value of Savings² [was] $20,476…”

On choosing between fixed and variable rates

“…mortgage financing continues to be a risk & reward decision that must be integrated within the personal balance sheet and a risk management strategy. The stability and composition of your job, the amount of equity in your home, the asset allocation of your RRSP and whether you have a pension, should all be weighed as part of the mortgage financing decision. ”

When it DOES make sense to put all your eggs in one basket.

The concept behind the Manulife One account is putting all of your savings and borrowings into one account at a floating interest rate. This approach is encouraged by Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business, York University. In a study to investigate the financial advantages of Canadians consolidating their debt, Professor Milevsky discovered that Canadians are spreading their debts and their savings over a wide variety of banking products and financial institutions… and it’s costing them. In fact, with debt, you want everything in one place, at one low interest rate because it could save you thousands.

Professor Milevsky explains (2 1/2 minute video)
Summary of report
Full research report

¹ “Mortgage Financing 2007: What Now?” Moshe A Milevsky & Brandon Walker, Schulich School of Business and the IFID Centre, September 7, 2007.

² The “Maturity Value of Savings” is the difference between the two strategies, assuming the borrower invested the difference between
i) what he or she would have paid if they had taken out a traditional 5-year fixed-rate mortgage and ii) what they actually pay, in 91-day treasury bills each month. Note that the study compared a traditional 5-year fixed-rate mortgage to a traditional variable-rate mortgage. Home Equity Line of Credit-type products, such as Manulife One, offer additional savings opportunities such as debt consolidation and using savings to reduce debt, but may have a slightly higher interest rate than the type of variable-rate mortgage referenced in this study.