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

/ c" [7 O& S0 X  m9 e+ Y; 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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! ^3 E  O4 M5 K  ?5 Z  B* ~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.

5 n5 ?5 p4 |; I. sA fixed rate locks the borrower into a set interest rate for a certain period of time.

& R  U- C) J6 T  p2 VThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

9 V8 A2 o3 S. i$ z8 vVariable rates change along with interest-rate moves.
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. |* Q  `3 R% k# CBMO 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.

. S7 ]1 J& b! _# X) fThe bank added that the current interest environment is similar to both of these periods.

* {% v! x* r4 A4 C"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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"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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) H7 p$ q2 y- q0 i# }Canada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
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. x' }1 D- ?8 IAs 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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