Vancouver Sun

A floating rate could still be the best deal for mortgage borrowers, even if the Bank of Canada raises interest rates three more times.

If that happens, the math shows borrowers with today's best widely available variable-rate mortgage at 3.90 per cent will come out ahead after five years compared to those who lock-in at today's best widely available five-year fixed-rate of 4.74 per cent.

Mortgage broker Rob Regan-Pollock of Invis Inc. looked at both a rapid tightening pattern, with three additional consecutive quarter-point rate hikes over the next five months, and a more gradual tightening with three increases over the next 20 months.

Either way, bank prime would climb from 4.75 per cent today to 5.50 per cent, with the variable-rate borrower at prime less 0.85 per cent eventually paying 4.65 per cent.

In the first scenario, a floating rate borrower of $175,000 -- a typical Canadian mortgage -- will owe $152,982 at the end of five years, assuming a monthly payment of $992. A fixed-rate borrower making the same payment will owe $154,248, or $1,266 more.

In the second scenario, using the same monthly payment, the floating-rate savings climb to $1,865.
Increasing the mortgage to $300,000 -- more typical of the average debt in high-priced Vancouver -- only increases the gains for the variable-rate borrower.

In scenario one, a floating-rate borrower of $300,000 will owe $262,255 at the end of five years, assuming a monthly payment of $1,700. A fixed-rate borrower making the same payment will owe $264,424, or $2,169 more.

The math assumes the central bank will stand pat on rates after three more hikes, but Regan-Pollock says a more likely scenario is a renewed easing cycle if the economy slows in 2006-07. In that case, the variable rate would come down.

Of course, rates could continue rising, and then the math turns against those borrowing at variable rates.

To keep the above numbers in perspective, bear in mind that saving $2,169 over five years on a $300,000 mortgage amounts to $1.18 per day, a small price to pay for peace of mind if you are worried about rising rates.

Steven Moyes
604-879-0228
E: Steven Moyes

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