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

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Fri Oct 23, 5:12 PM
7 A% P& m- W/ G( h6 w% g# Y5 O% EBy The Canadian Press
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TORONTO - 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.
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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.
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A fixed rate locks the borrower into a set interest rate for a certain period of time.

That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

2 X$ \: L; Q( K  {# d* ]# G1 MVariable rates change along with interest-rate moves.
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5 X# ~5 Y3 \6 sBMO 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.

2 n; V) h1 Q, Z6 ^+ p, @# m7 IBMO 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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" q: L, a% Q$ f9 n/ n( ?. d; 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.

& m/ S% i! p+ `* c! R: ]+ O"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."

( ^  m8 z; T" P) ~5 {# G6 a% f6 eCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

' c0 L  g3 S( A8 j+ @6 x4 |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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