How much do you owe on your mortgage?
A new study from the University of Toronto’s Simon Fraser University says the answer to that question depends on the length of your home loan.
The study, published online in the Journal of Financial Planning, looks at how long people take to pay off their mortgages, and the types of loans they have.
“What’s interesting about this study is that it looks at the longer-term effects of long-term loans on the value of your property,” said senior author Shubhank Joshi.
“We have the property value of a house and we have the mortgage amount and we also have the interest rate.
So what we’re looking at is how much is the interest paid and how much are the costs associated with servicing that loan.”
Long-term mortgages with fixed ratesA number of studies have looked at the impact of long loans on house values.
One study, for example, found that those with longer-standing mortgages have a smaller risk of foreclosure than those with shorter-term, fixed-rate mortgages.
The other study looked at how mortgage rates changed with the length and duration of a loan, and found that the longer a mortgage was, the more likely it was to default.
The University of Texas’ Benoit Tremblay and his colleagues looked at this relationship in an earlier study, and they found that a 10-year mortgage with a variable rate of 1.45% was associated with a 7% higher chance of default compared with a 10 year loan with a fixed rate of 2.05%.
But the current study has two big caveats.
It’s not a direct comparison between longer- and shorter-standing loans, and it’s not yet clear how much the variable rate increases the risk of default.
The study used data from the US Federal Reserve, but other studies have shown that mortgage rates can vary dramatically from place to place.
Joshi said the findings might also not apply to Canadians.
“Our study doesn’t take into account Canadians because it’s a global study, so we don’t have a comparative data set for Canadians,” he said.
“If you look at the data in Canada, we find the effect of a variable-rate mortgage is actually very small compared to the effect for the average Canadian.”
And for people with variable-rates mortgages, it doesn’t matter that much because the rates are so low that the effect on the average household is very small.
“For example, the average interest rate in Ontario is 1.3%.
The average rate in British Columbia is 1%.
But if you look across all the provinces, the effect is much smaller.”
It’s pretty interesting to see a different result if you use the same data,” said Joshi, who added that it could also be due to the fact that the average person who borrows for a mortgage with variable rates has more disposable income than the average borrower.
But he cautioned that a large proportion of Canadians with longer mortgages are also borrowers with variable mortgage rates, so there may be a link between variable and fixed- rate mortgages.”
The other thing that could be going on is that if you’re in a higher-income income bracket, you’re probably going to borrow at a higher rate,” he explained.”
That’s not necessarily going to be the case for all Canadians, but I think it’s very important to keep in mind.