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

' O9 z; O) D3 I3 b4 xTORONTO - 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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The 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.

. Q' }& j4 B4 g7 KA fixed rate locks the borrower into a set interest rate for a certain period of time.
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. b. b$ b  v8 A$ W) |That gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

Variable rates change along with interest-rate moves.

! L8 J5 E7 f8 fBMO 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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3 K9 I# T# D9 [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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The bank added that the current interest environment is similar to both of these periods.
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  N! v) u; K/ P0 r1 R% E4 w"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.

+ ^+ ^/ F5 c6 S$ O$ i0 ^0 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."

) F7 M$ J1 a% V7 ^4 |' x8 |1 zCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
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6 X9 V- _1 l, @6 _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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