ZT-BMO study says variable-rate mortgages better deal for borrowers most times

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Fri Oct 23, 5:12 PM
By The Canadian Press
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# m5 v# v3 d- d/ iTORONTO - Fixed mortgage rates may help you feel secure in your budgeting, but the Bank of Montreal (TSX: BMO.TO) says the more volatile variable rate mortgages will save you money in the long run.

3 Y4 K9 W# z* V3 B" J  kThe bank put out a report Friday showing that, over the past 30 years, variable-rate mortgages have been more cost-effective about 82 per cent of the time. That may come as a surprise to some after studies have shown many Canadians prefer a fixed-rate mortgage.

" Z! c9 S: k# ?: M9 }  yA fixed rate locks the borrower into a set interest rate for a certain period of time.
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That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

9 c1 _8 _) A" S# K' l. ^; }) [Variable rates change along with interest-rate moves.
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' n' U: W. N: g6 n* b! E  eBMO said the Bank of Canada's overnight lending rate is at its lowest possible point now, which could mean there are fewer benefits to a variable rate in the foreseeable future.
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. u4 v9 b+ _/ b# J" HBMO highlighted two historical periods when fixed rates were considered beneficial - in the late 1970s and late 1980s - and both were just before interest rates started rising again.

- d0 Y: P& P8 U* X% t) ^$ Y8 E) h# ]  SThe bank added that the current interest environment is similar to both of these periods.
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"Short-term rates are at extreme lows and pressure is likely to build for higher rates in the year ahead," said deputy chief economist Doug Porter in the report.
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" C$ [, ^8 |  J* }- J! c"The question of whether to lock in to a longer-term fixed mortgage rate or stay in a variable rate has become an increasingly complex and important issue."
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2 ?4 X1 K9 C; Q0 K+ |3 [4 }: qCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

- p8 t% Z- j# i& G2 T* P* VAs a result, the spread between five-year fixed mortgages and variable mortgages has been pushed wider in recent years, and is now near an all-time high.

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