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

# `+ g2 U7 c# b5 E. i! \; QTORONTO - 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.

; j3 L& i  z- H8 I" w& d( aThe 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.

; y9 j6 K2 r  I6 G0 T  l7 pA 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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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.

" k8 a9 d2 q+ M: w3 uBMO 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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% ^9 i# J& K$ @2 p4 FThe bank added that the current interest environment is similar to both of these periods.
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: G1 x/ m5 r! p+ e3 L"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.

! x; E) o1 d6 b4 q4 b1 r"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."

8 p9 k, S0 H! f( W2 BCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.

" `2 }4 x( w1 UAs 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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