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Fixed vs. Variable Rates - The Debate Continues

"A long-stalled overnight rate has had brokers embracing the variable-rate mortgage but will a new forecast from a major bank convince them that fixed is superior, once again?

“While we have in the past supported going variable, and even though short-term rates are likely to remain low this year, current offers on long-term mortgage rates and the improving economic outlook tilt the balance in favour of locking in at this stage—fixed now modestly trumps variable,” Douglas Porter and Benjamin Reitzes, BMO economists said in their latest report. “Not only does our interest rate outlook project an advantage to locking in at current attractive 5-year rates; but, combined with a shorter, 25-year amortization period, such a step would significantly dampen widespread concerns about the vulnerability of household finances.”

Entitled “Mortgage choices: The fixe(ed) is in,” Porter and Reitzes explain that although variable rate mortgages have been the cheaper option 85 per cent of the time since 1975, the value gap has been shrinking and an improving economy is believed to hike interest rates in 2015, which would result in a rate increase to variable products.

“The bond market has sent out loud warning signals over the past year that the era of low interest rates may finally be drawing to a close,” the economists said. “For instance, 5-year Government of Canada and U.S. Treasury bond yields neared 2½-year highs early in 2014, on an improving outlook for the global economy and expectations of continued Fed tapering.

“As bond yields rise, the cost of funds for lenders also rises, ultimately putting upward pressure on consumer and business borrowing costs, includeng long-term mortgage rates.”

Still, the pair don’t discount history and believe there is still a case to be made for choosing a variable rate mortage.

The clearest advantage to a variable rate mortgage is that it has consistently cost less than its conventional counterpart over time … (and) plus, one can always lock into a fixed rate at a later date,” they said."

 

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