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.

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.

A fixed rate locks the borrower into a set interest rate for a certain period of time.
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7 l9 q2 H9 h5 _7 i5 x( j1 o% MThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.
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7 W! Y$ L  K& _6 @% BVariable rates change along with interest-rate moves.

/ ~+ H( t3 s* A: K& y& zBMO 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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  |4 M- i* }' FThe 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.

0 ]" l% v! e# n"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.

' x1 [! h& l& `7 L* A6 S- ?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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