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

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Fri Oct 23, 5:12 PM
% U. g- L! l7 _* L- P) UBy The Canadian Press
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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.

# s% c) `1 v7 A8 r) i; x+ [$ 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.

, T0 ?. M$ T4 W- c$ ?A fixed rate locks the borrower into a set interest rate for a certain period of time.

& b! X: U; Q( `" L8 cThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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Variable 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.
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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.
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) C$ a6 [! K$ n' z' I) O2 Y/ d6 ^The bank added that the current interest environment is similar to both of these periods.

6 a! c: W1 m- ?"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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8 h  x( c7 M% L' T. w, O"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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( y# H; {" n, F( K6 LCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

1 W: Z- S% w* {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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