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

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Fri Oct 23, 5:12 PM
5 K7 r, h4 K+ }9 d9 `By The Canadian Press
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2 W) v) g# [2 G8 k# oTORONTO - 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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$ N- m8 x" D3 C# V, l5 n+ {6 AThe 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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That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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9 }7 r% |$ f2 m. ]+ f# `Variable rates change along with interest-rate moves.
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6 F/ x- y; a% A4 r+ Q5 X- I8 ^. RBMO 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.
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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.

6 S, b  K% C9 c6 LThe bank added that the current interest environment is similar to both of these periods.

0 z  o: @  I  \, z" a9 H# o* {"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.

6 E% e$ m  p' m* G) l* g" `"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.
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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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