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

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Fri Oct 23, 5:12 PM
; Y1 a1 o4 E) b2 I5 r- `  _. ~5 MBy The Canadian Press
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! ?, D0 d5 ]3 u6 ~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.

% D; h$ @; |+ RA 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.

Variable rates change along with interest-rate moves.
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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.

9 v1 s  _7 [: cBMO 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.

The bank added that the current interest environment is similar to both of these periods.
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% [8 z3 Y2 X. ]+ P, S3 B"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.

9 P3 u$ ?7 E# ?  x4 Y6 O% n* 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."

, _  D" s% w4 [0 S+ l% UCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
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- a, _% b9 n$ x; RAs 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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