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

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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6 E# y4 r& l: R: E  ]/ O9 J) ^2 MThe 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.
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That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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4 {# w) |5 n$ E5 ~1 N! jVariable 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.

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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/ U  r- Y  I8 y$ p7 V7 R4 e2 rThe bank added that the current interest environment is similar to both of these periods.
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' ^# b. K" Y7 W$ E: t"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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' a, T6 b' s" e/ m. o! `. a"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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Canada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

2 {$ F) s7 z* H% D7 K9 OAs 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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