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.

; x) y* A( ~2 |! j7 Q  QThat gives many borrowers peace of mind knowing how much money to set aside each month for their mortgage payment.

; D" u! c8 f  l  o* Q1 |Variable rates change along with interest-rate moves.

8 V6 L9 k+ H- J! d- U$ YBMO 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.

. `' V# P9 s8 b! R# z( X9 LBMO 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.

/ h: h/ F0 Z- i"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.
! u4 M* L6 ~4 l% v- l' M( G! m
1 k( @5 v' Y5 K9 K* |! Q( B0 I"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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5 \+ I2 V8 G- Y: \) E' J7 gCanada has been in a long-term declining rate environment since the early 1980s, the bank suggested.
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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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