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

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Fri Oct 23, 5:12 PM
+ s/ {1 L3 ]6 `; c' w; }- V* GBy The Canadian Press

TORONTO - 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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/ |' b/ W$ ?9 ]: NThe 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.

5 B% O" j& f$ ]- c8 M4 dThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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$ @, p5 [. X4 c; U2 {Variable rates change along with interest-rate moves.

. X( g( v' K. x) o/ MBMO 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.

- X- O, y" x1 D- }The bank added that the current interest environment is similar to both of these periods.

"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.
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"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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( r2 d( k8 y. ~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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