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
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3 y0 }- n; \5 l4 y. Y! CTORONTO - 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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$ X. E$ p1 D  n! G! t! T! gThe 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.

: u1 T+ h/ q7 w' w& {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.
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. R1 {9 Q9 ^* X3 W( e6 eVariable rates change along with interest-rate moves.
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- Y! \" |% b/ U( G5 d1 Y4 yBMO 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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8 p* d6 |* ?2 _; e- pThe bank added that the current interest environment is similar to both of these periods.

- F: Q, h4 S' E9 ?1 s, f% B, v"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.

3 ?! r7 `8 T& c; `  M, h"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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+ ~- K, C6 l' \2 e8 }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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