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

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Fri Oct 23, 5:12 PM
& U( ^3 I& l* s+ V) X+ E. r: OBy The Canadian Press
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$ _2 t! {" n8 U$ s; X. n2 A( G1 DTORONTO - 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.

The 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.

7 ~  M+ u- m& i' D1 w4 \+ nA fixed rate locks the borrower into a set interest rate for a certain period of time.

1 `8 K, ~! Q' b$ sThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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' b' w' Q; Z! s) F9 l+ x1 l5 iVariable rates change along with interest-rate moves.
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/ W. [' U+ p: b& X$ y2 a: \: \BMO 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.

" [& P* [4 U( x' bThe bank added that the current interest environment is similar to both of these periods.

"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."

Canada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

/ L8 v4 W( L. R' ~6 q1 p9 h6 {0 ~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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