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

' e' p  c. ^& Y8 k) M$ F5 jTORONTO - 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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& H( N( ~/ H9 T4 FThe 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.
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5 H+ f( r/ Z  U0 y' ?8 i4 cThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

. G. z6 y; Z# d) w9 F: n, KVariable rates change along with interest-rate moves.

9 O9 Z1 S9 X4 J  PBMO 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.

, Z$ v; s2 W* S# h7 |0 ]- O$ tThe bank added that the current interest environment is similar to both of these periods.

% |+ S: g! ?' p' Q+ E1 _7 Q"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.

# h! j0 ^# U' c7 w- _"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.

2 G& Y7 }) @7 A. 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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