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

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Fri Oct 23, 5:12 PM
8 ^( r9 _1 K9 i; N; pBy The Canadian Press

  Z( ^5 Q7 ?- [1 [2 K* STORONTO - 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.

4 Y) H' @) }1 |5 Y; H* a- j5 f9 JThe 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.

  Q) r) T7 \8 yA fixed rate locks the borrower into a set interest rate for a certain period of time.
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/ h  N6 e1 m' k$ P4 q' qThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

- ^. `* n# d: [* {' qVariable rates change along with interest-rate moves.
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: O7 e9 n. W+ I. S% `5 G& OBMO 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.

BMO 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.
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The bank added that the current interest environment is similar to both of these periods.

' P1 S3 Y7 Z1 b: Y0 ]"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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"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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Canada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

As 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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