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

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Fri Oct 23, 5:12 PM
/ _; S2 {* o, v) R  wBy The Canadian Press
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% e4 m1 A4 X" d- H! j- g4 KTORONTO - 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.

- {# m* S0 D1 t0 x2 I, `- ~& Z/ }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.

+ X$ {1 K; T+ ^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.

8 C7 s4 ]3 m% y7 sVariable rates change along with interest-rate moves.
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. B$ n: u7 L: |" V. ^0 j: I( ]; c1 ABMO 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.

; f. I8 H/ R7 i3 a2 WThe 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.

! o" @/ N' f9 A4 I6 T"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."

4 N3 ]& {. {: C8 _* R" e7 d4 G- q# fCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

* b% G% g; L6 j& [6 k" xAs 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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