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

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Fri Oct 23, 5:12 PM
$ K) z/ ~* p+ y( P1 gBy The Canadian Press
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* ^6 l5 h7 h4 TTORONTO - 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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, F0 ^" q$ Y; D! s" t  HThe 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.

; e( i( e1 p7 d! v: y1 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.
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# S# f/ g1 |6 ^Variable rates change along with interest-rate moves.

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.
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2 b+ u7 A7 D5 F/ \8 z+ UThe bank added that the current interest environment is similar to both of these periods.

5 C4 p/ T, @6 q8 I: e5 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.

+ Y3 \! v( ]' |9 Q3 B( I"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."

2 ^0 e# h* T' e, ?* p" o6 HCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
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5 E2 I* V' u3 [4 [) O" 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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