Which mortgage rate is better?
- 主题发起人 CFB
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CFA
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你怎么知道BOC会只升不降?而且Bank prime和BOC的target rate之间的spread也是可以变动的,也就是说即使BOC降息的话,银行也可能不降prime.
理论上来讲,有了swap curve,你就可以算出forward CDOR,加上一个spread,可以forcast Bank prime rates,然后假设bank prime会follow这些forword rates,你就可以大致算出是variable好还是fixed好.但这只是一个预测,因为volatility的原因,真正的利率可能会不同于forward rates.
Locking-in long-term will probably cost consumers money rather than save money.
I have seen a wonderful example in a financial book how variable rate saves your money even though the interest rate goes up. However, I could not find the book now. I can only find an article from the internet. The paper mentioned in the link is a little bit complicated. Hope it is useful to our discussion.
Long Or Short Term Mortgages? (zt)
Several years ago (five to be precise), I wrote an article comparing the cost of opting for a long-term mortgage rather than a short-term mortgage. Not having an academic mind, my study was anything but scientific, although I did rely on actual mortgage interest rates over a five-year period. In the end, my conclusion was that borrowers were most likely to be better off choosing a short-term mortgage over a long-term mortgage.
This past week I was reading an article in the quarterly newsletter, Moneywise, published by local mortgage broker, Seville Mortgage Corporation in which reference is made to a study conducted by Moshe Milevsky, Associate Professor of Finance at York University in Toronto.
The study, based on an analysis of interest rates over a 50-year period (1950 - 2000), compared the cost of financing a mortgage with short-term prime interest rates to long-term fixed rates. This study (Mortgage Financing: Floating Your Way to Prosperity, (Toronto, ON: York University, January 2001)) differs from my simple analysis in that it compares variable mortgage rates with longer, fixed mortgage rates. In each case, however, the issue is essentially the same - should borrowers leave themselves exposed to the effect of interest rate fluctuations or lock-in to mitigate the effect of such changes?
Conventional wisdom says that when mortgage rates drop to at, or near, record lows, mortgage holders should rush to "lock in" for longer terms. The basic premise of this sage advice is that the probability of interest rates rising in the future is greater than the probability of rates declining, therefore, borrowers should count their lucky stars and fix their mortgage rate for the longest period of time possible.
Locking in a mortgage for a longer term is also advice frequently given to first-time buyers albeit often for a different reason. Many first-time buyers stretch themselves to the limit to get into the housing market. For this reason they are unable or unwilling to suffer the effect of a rise in their regular mortgage payment and opt to lock in for a long-term mortgage.
The conclusion of Professor Milevsky's study is that Canadians pay a significant price buying the peace of mind longer-term mortgages provide. In fact, over the 50-year period considered Canadians on average would have saved a whopping $22,000 in interest costs on a $100,000 mortgage (15-year amortization) by choosing a variable rate mortgage over a locked-in, five-year mortgage. Furthermore, Professor Milevsky notes that 88.6 per cent of time borrowers would have been better off at a floating prime rate rather than locking in for a five-year, fixed-term mortgage.
Looking at this from the other side, only 11.4 per cent of the time would consumers have been worse off by borrowing at prime instead of the five-year rate. So, by locking in for the long-term, consumers are accepting the fact that the odds are they will be paying substantially more in the long-run than would otherwise be the case.
Many consumers choose a long-term mortgage in the belief that locking-in will save them money over the long haul when, in fact, the opposite is most likely to be true - locking-in long-term will probably cost consumers money rather than save money. If you have internet access and you'd like to read Professor Milevsky's working paper you'll find a link (in Adobe Format) at www.yorku.ca/milevsky/ifidwp.htm.
Seville's newsletter points out that "the flexibility offered by the variable rate mortgage products on the market today make it even more beneficial as they are all prime-minus products that offer very attractive rates in the first three to six months". That being the case, if you're in the mortgage market today and payment certainty isn't a big issue, it's hard not to consider a variable-rate mortgage based on the above. Going short is where it's at as long as you can handle fluctuations in the amount of your mortgage payment.
(Jim Maroney is a chartered accountant
with Andrews Brown Maroney in Maple Ridge.)
I have seen a wonderful example in a financial book how variable rate saves your money even though the interest rate goes up. However, I could not find the book now. I can only find an article from the internet. The paper mentioned in the link is a little bit complicated. Hope it is useful to our discussion.
Long Or Short Term Mortgages? (zt)
Several years ago (five to be precise), I wrote an article comparing the cost of opting for a long-term mortgage rather than a short-term mortgage. Not having an academic mind, my study was anything but scientific, although I did rely on actual mortgage interest rates over a five-year period. In the end, my conclusion was that borrowers were most likely to be better off choosing a short-term mortgage over a long-term mortgage.
This past week I was reading an article in the quarterly newsletter, Moneywise, published by local mortgage broker, Seville Mortgage Corporation in which reference is made to a study conducted by Moshe Milevsky, Associate Professor of Finance at York University in Toronto.
The study, based on an analysis of interest rates over a 50-year period (1950 - 2000), compared the cost of financing a mortgage with short-term prime interest rates to long-term fixed rates. This study (Mortgage Financing: Floating Your Way to Prosperity, (Toronto, ON: York University, January 2001)) differs from my simple analysis in that it compares variable mortgage rates with longer, fixed mortgage rates. In each case, however, the issue is essentially the same - should borrowers leave themselves exposed to the effect of interest rate fluctuations or lock-in to mitigate the effect of such changes?
Conventional wisdom says that when mortgage rates drop to at, or near, record lows, mortgage holders should rush to "lock in" for longer terms. The basic premise of this sage advice is that the probability of interest rates rising in the future is greater than the probability of rates declining, therefore, borrowers should count their lucky stars and fix their mortgage rate for the longest period of time possible.
Locking in a mortgage for a longer term is also advice frequently given to first-time buyers albeit often for a different reason. Many first-time buyers stretch themselves to the limit to get into the housing market. For this reason they are unable or unwilling to suffer the effect of a rise in their regular mortgage payment and opt to lock in for a long-term mortgage.
The conclusion of Professor Milevsky's study is that Canadians pay a significant price buying the peace of mind longer-term mortgages provide. In fact, over the 50-year period considered Canadians on average would have saved a whopping $22,000 in interest costs on a $100,000 mortgage (15-year amortization) by choosing a variable rate mortgage over a locked-in, five-year mortgage. Furthermore, Professor Milevsky notes that 88.6 per cent of time borrowers would have been better off at a floating prime rate rather than locking in for a five-year, fixed-term mortgage.
Looking at this from the other side, only 11.4 per cent of the time would consumers have been worse off by borrowing at prime instead of the five-year rate. So, by locking in for the long-term, consumers are accepting the fact that the odds are they will be paying substantially more in the long-run than would otherwise be the case.
Many consumers choose a long-term mortgage in the belief that locking-in will save them money over the long haul when, in fact, the opposite is most likely to be true - locking-in long-term will probably cost consumers money rather than save money. If you have internet access and you'd like to read Professor Milevsky's working paper you'll find a link (in Adobe Format) at www.yorku.ca/milevsky/ifidwp.htm.
Seville's newsletter points out that "the flexibility offered by the variable rate mortgage products on the market today make it even more beneficial as they are all prime-minus products that offer very attractive rates in the first three to six months". That being the case, if you're in the mortgage market today and payment certainty isn't a big issue, it's hard not to consider a variable-rate mortgage based on the above. Going short is where it's at as long as you can handle fluctuations in the amount of your mortgage payment.
(Jim Maroney is a chartered accountant
with Andrews Brown Maroney in Maple Ridge.)
It makes no sense to me at all if you know the rate is the lowest, and will go up for sure, you still want to choose variable rate. I believe the main reason for us to choose variable rate is we believe the rate will go down in the near future. CFB, could you please let me know where you got the 5 year rate, thanks.
CFA
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You are absolutely right.Because the yield curve is not flat and the mortgage loan is amortized, the breakeven point should be beyond the 5-yr fixed rate.
Definitely, VRMs are now cheaper than FRMs and I believe the rates will remain low for a while. As such, VRM may be a better choice, but only temporarily.However,in long run, especially after the teaser period and if the rates hike up, VRM may end up causing you more than FRM.
Personally,I took a 5-yr fixed mortgage for the peace of mind. There is no free lunch.Everything has a price. I think the bottom line is to balance your budget,i.e., match your assets with your liabilities.I know most VRMs have a clause allowing you to convert your VRM into FRM(to lock in).So for those who choose VRM,just keep an eye on the rates.
建议想买房的朋友，最好先做个Mortgage Pre-Approval。如果利率涨了可用原先的利率，降了可用新的低利率。Pre-Approval过期后，可以再做一个。但是要避免同一时期做好几个，因为太多人同时打听你的Credit对你的Credit不好。你也可以自己要一份自己的Credit，很多情况你还能发现一些错误并改正呢！
还有我的经验就是尽量不用Broker，直接找银行。一般银行不会一下子就给你最好的利率，可是如果你说我的朋友谁谁谁得到了某某某利率，银行会给你同样的Match。如果万一这家银行真不能给你，货比三家总能得到，因为毕竟有人得到了，说明银行还是能赚钱。只是你不能乱编一个骗别人。
至于加拿大各个银行还是各有特色，我多年打交道得出了一些亲身体会。不过这是主观，片面的观点，也就不乱发表评论了。
还有我的经验就是尽量不用Broker，直接找银行。一般银行不会一下子就给你最好的利率，可是如果你说我的朋友谁谁谁得到了某某某利率，银行会给你同样的Match。如果万一这家银行真不能给你，货比三家总能得到，因为毕竟有人得到了，说明银行还是能赚钱。只是你不能乱编一个骗别人。
至于加拿大各个银行还是各有特色，我多年打交道得出了一些亲身体会。不过这是主观，片面的观点，也就不乱发表评论了。
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