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

9 m( m, J. I1 j8 |9 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.

/ ?( j) N& w- {( L6 [, E' H' a. bThe 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.

6 u) m  ~2 Z' K4 Q$ ~$ ]" WA 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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  r7 H" G% p5 _! w2 Q0 RVariable 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.

( i7 `: d/ v) x/ J+ |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.
% I8 r# W# t* _; U# |6 A: J# S( i
9 W4 O8 a# x9 W: U+ ]The 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.

& \  L5 a. ]4 ^5 A& O& 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."

  h- m$ i1 j* o; {: U0 L: F' pCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

. P- B5 b0 |- J( AAs 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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